Your business owns a piece of heavy machinery that is worth $300,000. However, y

Question

Your business owns a piece of heavy machinery that is worth $300,000. However, your insurance agent has no idea how much the machinery is really worth. You are considering two options. One is to purchase a policy that insures your machinery for $250,000. You figure this will save money on your insurance bills. You are also considering insuring your machinery for $350,000. You figure if you get this policy, you will pay more for the insurance, but if your machinery is destroyed, you will not only get back enough money to purchase new machinery, but a $50,000 bonus to boot. For both of these, what kind of payment do you think you would receive if your machinery is destroyed and your agent discovers the true value of your machinery? Make sure to cite DuBoff (2004) in your answer.

Explanation / Answer

The best option is to get the insurance policy of $250,000 because of two main reasons and these reasons are:

The other option of paying $350,000 is bad because of the two reasons:

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