Question

Just before his first attempt at bungee jumping, John decides to buy a life insurance policy. His annual income at age 30 is $36,000, so he figures he should get enough insurance to provide his wife and new baby with that amount each year for the next 35 years. If the long-term interest rate is 6.9%, what is the present value of John's future annual earnings? (Round your answer to the nearest cent.) Rounding up to the next $50,000, how much life insurance should he buy? (Round your original answer to the nearest $50,000.) $

Answer 1

Present value of John's future annual earnings= 458,155.67

John should get life insurance equal to $450,000.

Explanation:

Present value of an ordinary annuity

`Present value =PMT*([1-(1+i)^-^n])/(i)`

where PMT = the value of the individual payments in each period = $36,000

i = the interest rate that would be compounded in each compounding period = 0.069

n = the number of payment periods = 35

Present value of John's future annual earnings =
`36,000*([1-(1+0.069)^-^3^5])/(0.069)` = 458,155.67

458,155.67 rounded up to the nearest $50,000 is $450,000. therefore John should get life insurance equal to $450,000.