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A firm has an investment project that will cost the firm $30 million but will generate $2 million of NPV. Also there is a 5% chance that the firm will lose a lawsuit to employees, and be forced to pay damage of $30 million. Suppose that a liability insurance policy with a $30 million limit has a premium equal to $1.5 million.

A. Compute expected claim cost

B. Compute the amount of loading on the policy

C. Compute the expected cost of not pursuing this project

D. Should the firm purchase this insurance or not? Why or why not?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92856821

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