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 4.7 percent, how much will you pay for the policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

You will pay $744,680.85 for the policy

Step-by-step explanation:

Step 1

Since cash flow is a perpetuity, we can derive the following expression;

P.V=C/r

where;

P.V=present value of the investment

C=cash flow

r=annual rate of return

In our case;

P.V=unknown

C=$35,000

r=4.7%=4.7/100=0.047

replacing;

P.V=35,000/0.047

P.V=744,680.8511

744,680.8511 rounded off to 2 decimal places=744,680.85

You will pay $744,680.85 for the policy