A firm has the following probability distribution for annual losses due to vandalism. All amounts are before any tax consideration. The firm has a tax rate of 20%.

Annual LossesProbability

$ 00.75

$ 4,000 0.20

$10,000 0.05

The firm is considering three options:

1. Retention

2. Deductible insurance, Face amount = $10,000, Deductible = $300,

Premium = $1300

3. Full insurance, Face amount = $10,000, Premium = $1500

1. Derive the after-tax loss matrix for the firm. (4 points)

2. If the risk manager's decision rule is to minimize after-tax expected cost, which option will she choose? Show why? (3 points)