Question

You are considering an investment that will pay you and your heirs $5,000 at the end of each year forever. The price of the investment is $72,000. Given your expertise with time value from Finance 3403, you are concerned that this price may not be fair. If you can earn 8% annually on your money, what would you consider to be a fair price for the investment?

Answer 1

Answer:

Fair price of the insurance policy is $62,500.

Explanation:

We have given that an investment that will pay you and your heirs $5000

So the annual cash flow = $5,000

It is given that you can earn 8 % annually on your money

Required rate of return = 8%

We have to find the fair price for the investment

Price of this annuity $=\frac{5000}{0.08}= 62500$

Fair price for the investment is $62,500.