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.

Question

Quizplus · Accepted Answer

The Answer of 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