Question

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is 5.5 percent, how much will you pay for the policy

Answer 1

Answer:

$636,363.63

Explanation:

The computation of the amount paid for the policy is shown below:

As we know that

The Present value of perpetuity = Annual inflows ÷ required rate of return  on this investment

where,

Annual inflows is $35,000

And, the required return is 5.5%

Now placing these values to the above formula

So, the amount paid for the policy is

= $35,000 ÷ 5.5%

= $636,363.63