BU353 Lecture Notes - Lecture 6: Retail Loss Prevention, Net Present Value
Document Summary
Loss control is expenditures of time, money, or effort to reduce expected losses: loss prevention, reduce probability of loss, loss reduction, reduce severity of loss, can be before or after a loss occurs. Importance of indirect losses: recall, large losses can cause significant indirect losses, lost profits, continuing and extra operating expenses, costs of raising capital, foregone investment opportunities, bankruptcy costs, thus, reducing probability of large losses can reduce indirect losses. Look at pv of expected cash flows rising from a risk management decision: setting up a captive, choosing between loss financing alternatives, looking at effectiveness of loss control, use npv criterion, undertake loss control if npv > 0. Individuals are willing to accept riskier situations for a higher premium or lower cost. To calculate the benefit, the number of lives saved is multiplied by the value of a life, where cost of life is often valued based on where the savings originate.
