The Rs 8,00,000 property of the Goodwill India Co has one-tenth of one per cent chance of
Question:
The Rs 8,00,000 property of the Goodwill India Co has one-tenth of one per cent chance of catching fire that will cause damage to the property to the extent of Rs 1,00,000; and a one-twentieth of one per cent chance of catching fire that will completely destroy the property. The management of the company decides to insure the property and is reviewing two alternative insurance policies:
(a) A policy with Rs 50,000-deductible, that is, the insurance company covers all losses expect the initial Rs 50,000. The annual premium for such a policy is known to be one-tenth of one per cent of the value of the property.
(b) A no-deduction policy with full compensation having an annual premium of Rs 1,000.
If the company's objective is cost minimisation, which policy should it opt for? Sketch both, the pay-off table and the opportunity loss table, for the situation and solve both of them.
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