The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that

Question

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $24,000 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.)

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $24,000 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.)

Explanation / Answer

This is a perpetuity, and we need to compute PV of this perpetuity:

PV = pmt / r

      = 24,000 / 0.063

      = 380,952.38

Therefore, we have to pay 380,952.38 for this insurance policy.

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