TV Queen

BALANCE SHEET

as of June 30, 2000

ASSETS

Total Current Assets $6,000,000.00

Long Term Assets:

Total Long-term Assets $1,500,000.00

TOTAL ASSETS $17,500,000.00

LIABILITIES:

Total Current Liabilities $4,000,000.00

Long Term Liabilities

Total Long-term Liabilities $9,500,000.00

TOTAL LIABILITIES $3,500,000.00

TOTAL STOCKHOLDER'S EQUITY $4,000,000.00

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $17,500,000.00

The CFO of TV Queen is looking for the best way to finance workers' compensation risk. TV Queen is looking at a traditional third-party vs. forming a captive insurance company to address this loss exposure.All financial information on the balance sheet will stay steady for the next decade and TV Queen's internal rate of return is 10%.

TV Queen has investigated the captive option.Management has determined start-up costs for the captive insurance company would be $225,000 and annual premiums will be a level $110,000 over the next 10 years to ensure that the captive has the resources to pay for all workers' compensation claims.

TV Queen has obtained a quote from a highly rated third-party insurer who is willing to guarantee that TV Queen's insurance premiums will be $150,000 per year for the next 10 years for its workers' compensation claims.

Question. Should the company start a captive or purchase workers compensation insurance from a third- party insurance company? Why? Remember, this decision has a 10-year time horizon.

I need help in determining where to start with this problem.