Question

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is "4.7 percent", how much will you pay for the policy

Answer 1

$744,680.85

Step-by-step explanation:

Data provided as per the question below:-

Payment received = $35,000

Required rate of return = 4.7%

The computation of amount paid for the policy is shown below:-

Present value of a perpetuity payment = Payment received ÷ Required rate of return

= $35,000 ÷ 0.047

= $744,680.85

Therefore, for computing the present value we simply divide required rate of return by payment received