project viability

PQR Health Insurance Company wants to set up a small subsidiary. All the particulars of the project are given below:

The estimated capital expenditure at the start of the project is $.50,00,000.

Each policy holder will incur a yearly cost of $.500 per policy at the start of the each year.

Commission per policy sold will be 20% of the premium and will be paid to the agents at the time of the sale.

The premium per policy will be $.5,000.

The claim amount is 5 times premium and the probability of the claim is 5%. The company incurs the claim cost at the end of the year.

The company plans to sell x, 2x, 3x, 4x and 5x number of policies over a five year period starting from the third year. Thereafter the sales will remain constant at 5x policies per year. The policies are sold at the beginning of the each year.

a) Assuming an effective rate of the interest 7.5% p.a., show that the minimum value of x for which the business will breakeven at the end of the seventh year is 200.

b) PQR Health Insurance Company requires at least 18% per annum effective rate of return on the project. Assuming that the business will run in perpetuity with the value of x the same as in (a), determine whether the project is viable.

 

I have solved the first part and attaching the jpg copy with it. My Problem is the second part.

 

PHP:

 

http://asmkdas.blogspot.in/

 

I have upload an attachments

 

You've not asked a specific question - but it looks to me like your solution to (b) is missing a v^4 in front of each of the perpetuities (to account for the fact that those cashflows don't start until the start of the fifth year, ie time 4).

Perhaps that fixes it.

 

actually my problem was part (b), the correct answer is 3480483, thanks for correcting the equation for me.

best wishes,
Asim Kumar Das.