Establish whether the supermarket should install the machine given that the prevailing risk free rate is 8%, corporate tax rate 30%, expected market return 14 % and beta is 0.7

a) A supermarket risk manager is considering the installation of a CCTV camera at their Nyeri branch to prevent theft of stocks in the supermarket. The camera will costs kshs. 12 million and will require an annual maintenance costs of kshs. 1,440,000. If installed the camera will prevent loss of kshs. 3,600,000 on average annually. The expected useful life of the camera is 20 years and with a salvage value of kshs. 2,000,000. Establish whether the supermarket should install the machine given that the prevailing risk free rate is 8%, corporate tax rate 30%, expected market return 14 % and beta is 0.7 [10 marks]

b) Explain the following terms us used in the insurance industry

i)Annuity ii)Moral hazard iii)Involuntary retention iv)Double insurance.

v) Replacement [5 marks]

c) Describe how the review of implemented risk strategy should be carried out by risk managers in business enterprises? [10 marks]


 

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