the owner of best hotdogs, noticed more and more people taking hotdogs into the park across the street from her store. She has decided to purchase a hotdog oven to attract more customers into her store. The oven will cost $25,000 and is expected to generate a before-tax annual net cash flow of $30,000 in each of the ten years of its useful life, after which the oven will literally not work much like its owner; that is, the oven will have no salvage value. This expected annual net cash flow does not include any allowance for possible damage to the oven. The oven will be used by party store employees with limited experience and training due to the high turnover. Hella also requires an after-tax time-adjusted rate of return of 15 percent or greater (the rate of return that the store averages on its other assets). Assume straight-line depreciation and a 20 percent income tax rate.

As the owner of a small business, Hella is also the risk manager of her business. She must decide whether to retain the physical damage losses to the oven (retention), retain the losses but spend $1,000 annually for safety training and maintenance on the oven (loss control), or spend $3,500 annually to insure damage to the oven (with a deductible so there is still some loss not covered by insurance and retained, as indicated in the insurance probability distribution given Below).

Based on past loss experience, the annual expected amount of damage to the oven is described by the probability distributions Below

Design a Microsoft Excel spreadsheet that calculates information to answer the following questions. Submit the answers in the spreadsheet, at the bottom, below the calculations. Please answer the questions in the order provided below and clearly label your answers 1, 2, or 3. Please do not retype the questions in the spreadsheet.

1. What is the annual expected value of the damage to the hotdog oven if hella does nothing to manage the risk?

2. Does purchase of the oven and retention, or loss control, or insurance generate an after-tax time-adjusted rate of return of 15 percent or greater?

3. Based on your quantitative analysis and other considerations in making the risk management decision, which risk management technique would you recommend that hella decide to use? Why? (Refer to your calculated information, as well as other considerations, and recommend only one technique for this assignment.)

Annual Losses $0 $10,000 $25,000 Retention Probability Distribution 0.20 0.40 0.40 Loss Control Probability Distribution 0.65 0.20 0.15 Insurance Probability Distribution 0.90 0.07 0.03 Annual Losses $0 $10,000 $25,000 Retention Probability Distribution 0.20 0.40 0.40 Loss Control Probability Distribution 0.65 0.20 0.15 Insurance Probability Distribution 0.90 0.07 0.03