Answer:
a discount rate of 5%
Explanation:
The formula to calculate the present value of a perpetuity is:
PV = PMT / r
Where PV is the present value, PMT is the constant payment, and r is the discount rate.
In this case, the PMT is $25,000 and the PV is -$500,000 (negative because it represents a cash outflow). So we can rearrange the formula to solve for r:
r = PMT / PV
r = $25,000 / -$500,000
r = -0.05 or -5%
Therefore, at a discount rate of 5%, the policy would be a fair deal.
To calculate this in Excel, you can use the following formula in a cell:
=r(-25000/500000)
This will give you a result of -0.05, or -5%, which represents the fair discount rate.
Hope this helps!