BU353 Lecture Notes - Lecture 6: Cash Flow, Net Present Value
Document Summary
Numerous activities reduce expected losses by reducing the frequency of losses (loss prevention). An extreme example of loss prevention is to avoid completely the activity that potentially gives rise to the loss (loss avoidance). Activities that reduce expected losses by decreasing the size of the loss conditional on a loss occurring are called loss reduction; they can occur before or after a loss. Pre-loss activities occur before a loss; they decrease the magnitude of a loss if one occurs. Post-loss activities occur subsequent to an event that causes a loss. An important type of pre-loss reduction activity is disaster response or catastrophe planning. Segregation of exposure units when a firm diversifies risk by segregating loss exposures into smaller exposure units; reduces the variance of direct losses and the maximum probable direct loss. Optimal loss control decisions required that loss control expenditures be made up to the point that the marginal benefits no longer exceed the marginal costs.
