Question

You are concerned about the risk that an avalanche poses to your $3 million shipping facility. Based on expert opinion, you determine that there is a 5 percent chance that an avalanche will occur each year. Experts advise you that an avalanche would completely destroy your building and require you to rebuild on the same land. Ninety percent of the $3 million value of the facility is attributed to the building and 10 percent is attributed to the land itself. What is the single loss expectancy of your shipping facility to avalanches?
A. $3,000,000
B. $2,700,000
C. $270,000
D. $135,000

Answer 1

Answer: The single loss expectancy of the the shipping facility is $2,700,000.

Explanation: The total value of the facility is worth $3,000,000. Building and land inclusive.

The Building is worth 90% of $3,000,000 which is 0.9 × $3,000,000 = $2,700,000

while the land is worth 10% of $3,000,000 which is 0.1 × $3,000,000 = $300,000.

If any event of an avalanche, only the building is destroyed but the land remains.

If an avalanche happens and the building is destroyed, the single loss will be $2,700,000. Because the land still remains which is valuable.