Question

The maybe pay life insurance co. is trying to sell you an investment policy that will pay you and your heirs $39,000 per year forever. if the required return on this investment is 5.8 percent, how much will you pay for the policy? (do not round intermediate calculations. round your answer to 2 decimal places,
e.g., 32.16.)

Answer 1

Answer:

Step-by-step explanation:

Given that,

Investment policy pay

PV= $39,000/year

% investment return =5.8%

r= 5.8% =5.8/100 = 0.058

Even though we need to calculate the value for one year, so we need to use one years as the number of periods. To find the FV of a lump sum, we use:

FV=PV/r

FV=39,000/0.058

FV= $672,413.7931

To 2d.p

FV=$672,413.79

Answer 2

This cash flow is a perpetuity. To find the present value of perpetuity, we use the equation of
Pv=C÷r
Pv=39,000÷0.058
Pv=672,413.79