Question

The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $14,500 per year forever. If the required return on this investment is 5.1 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.) Present value $ Suppose the company told you the policy costs $310,000. At what interest rate would this be a fair deal? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Interest rate %

Answer 1

Instructions are listed below

Step-by-step explanation:

Giving the following information:

Will pay you and your heirs $14,500 per year forever. The required return on this investment is 5.1 percent.

a) We need to find the present value of a perpetual annuity.

PV= Cf/i

PV= 14,500/0.051= $284,313.73

b) Now, the present value is $310,000.

310,000= 14,500/i

i=14500/310,000= 0.0467= 4.67%