Payout Period Impact on the Net Present Value of Workers Compensation Costs

Carlito Turbines is a manufacturing firm that determined that its payout schedule for its workers compensation losses is as follows:

Year	Payout %
1	30%
2	22%
3	23%
4	10%
5	15%
Total	100%

If the firm fully insures this exposure, the premium will be $900,000 payable upon inception of the policy. The premium represents 70% loss and 30% administrative expense.

1. Demonstrate and explain if there are any cash flow advantages of self-insuring this loss if the firms cost of capital is 6%. All calculations must be shown and your recommendations must be fully supported.

2. Describe some other benefits to Carlito for self-insuring the companys workers compensation exposures.