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If this group is still active, can someone add nicholisodegaard21@gmail.com. Thank you!
We used 4% when the DE is negative in the EV formula and applied the formula one more time to bring it back to time 0
Here is a link to google group I found for the module:
https://groups.google.com/u/0/g/Introduction-to-ILA-ModuleHopefully, this is my last question. For the coinsurance tab, are your EV results 26.66 and 17.21 for the 20-year and 40-year time horizons? I think its weird that the 40-year horizon has a higher EV value than the baseline group.
Okay sounds good. Thanks for discussing this through, Steve. I feel better about my answers. I think for ROI either of our answers should be acceptable as long as we explain our logic.
FYI, here is a link to a google group. Not sure how active it is but there may be other questions you had that may already be answered:
https://groups.google.com/g/Introduction-to-ILA-ModuleYeah the example in section 11.6.2.3 is the one I used to base my answer off of. I did not use the IRR function. Instead I used used formula 11.5.3 and used 10% when discounting negative cashflows and then used goal seek to determine the ROI such that the PV at 0 was 0.
For the EV, I also used 11.5.3 directly just as the textbook did it. I see where you got your 16.10. I did the calculation 1 more time. You stopped in column C when I applied the formula one more time to get to 14.64 to get to time 0. Since I applied the formula one more time than you, then I would be assumed DE occur at end of year. Based on example, 11.6.4 I feel like my way may be correct.
One last question about NB strain, since DE in year 1 is negative, you get a negative percentage (-57.9%). Did you leave it as negative or take the absolute value?
It sounds like we did it similarly. I used the hurdle rate instead of the the investment rate because in the profit measures reading (may be the what you are referencing) one of the examples mentioned used 7%, which was the hurdle rate, to discount when DE is negative. To solve for the ROI, I used formula 11.5.3 that was referenced in the reading. For the baseline 40-year horizon, I got 11.2% as the ROI.
For Embedded Value, I used the 4% to discount when DE are negative and then the 10% hurdle rate when positive because the section on PV said that the discount rate to use for negative DE is typically set less than the hurdle rate and is typically set to the investment rate. For the baseline 40-year horizon, I got 14.64.
Let me know if that sounds reasonable.
Also, I am having a little trouble figuring out how to calculate NB strain as a % of premium, is it simply first DE (cell C43) divided by first year premium (cell C27)?
