Question

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $27,000 per year forever. If the required return on this investment is 6.3 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.) Present value $ ________

Answer 1

Answer:

Present value = $428571.4286 rounded off to $428571.43

Explanation:

To determine how much should be paid for the policy today, we must calculate the present value of perpetuity. The policy returns are in the form of a perpetuity as they are paid in a constant amount after equal intervals of time and for an indefinite time period. The formula for the present value of perpetuity is,

Present value = Cash flows / r

Where,

• r is the required rate of return

Present value = 27000 / 0.063

Present value = $428571.4286 rounded off to $428571.43