Use the Information for the Question(s)below

question 9

Multiple Choice

Use the information for the question(s) below.
Your firm faces an 8% chance of a potential loss of $50 million next year.If your firm implements new safety policies,it can reduce the chance of this loss to 3%,but the new safety policies have an upfront cost of $250,000.Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%.
-If your firm is uninsured,the NPV of implementing the new safety policies is closest to:

• A)$2.25 million.
• B)-$.25 million.
• C)$2.5 million.
• D)$2.15 million.

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Definitions:

Lost Sales

Potential sales that were not realized due to stockouts, capacity issues, or other factors that prevented the completion of a sale.

Special Order

An order placed by a customer that requires a company to make a product with specifications that differ from their standard product line.

Incremental Analysis

The process of evaluating the financial consequences of choosing one option over another in decision-making.

Differential Analysis

The process of comparing the financial differences between alternative business actions in order to make informed decisions.