An insurance company specializes in selling warranties for consumer electronics products. For selling these warranties they receive cash up front, but later they must pay out cash for policyholders who file claims. Suppose a particular product they sell brings in $1 million in cash right away but requires them to pay $1.2 million in claims a year later. The firm's cost of capital is 10%. Calculate the IRR that the firm earns on the product and comment on whether it is a good investment.
An insurance company specializes in selling warranties for consumer electronics products. For selling these warranties they receive cash up front, but later they must pay out cash for policyholders who file claims. Suppose a particular product they sell brings in $1 million in cash right away but requires them to pay $1.2 million in claims a year later. The firm's cost of capital is 10%. Calculate the IRR that the firm earns on the product and comment on whether it is a good investment.
Chapter2: The Domestic And International Financial Marketplace
Section: Chapter Questions
Problem 7P
Related questions
Question
An insurance company specializes in selling warranties for consumer electronics products. For selling these warranties they receive cash up front, but later they must pay out cash for policyholders who file claims. Suppose a particular product they sell brings in $1 million in cash right away but requires them to pay $1.2 million in claims a year later. The firm's cost of capital is 10%. Calculate the IRR that the firm earns on the product and comment on whether it is a good investment.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps with 2 images
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning