Question

The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $18,500 per year forever. a. If the required return on this investment is 5.9 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.) b. Suppose the company told you the policy costs $460,000. At what interest rate would this be a fair deal? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

a. $313,559.32

b. 0.0402, or 4.02%

Explanation:

The computation is shown below:

Here we use the following equation

PV = C ÷ r

Present value

= $18,500 ÷ 0.059

= $313,559.32

b. Now the interest rate is  

As we know that

PV = C ÷ r

$460,000 = $18,500  ÷ r

r = $18,500 ÷ $460,000

= 0.0402, or 4.02%

We simply applied the above formula so that the correct value could come

And, the same is to be considered