Question

Earl has a life insurance policy that will pay his family $59,000 per year if he

dies. If interest rates are at 3.3% when the insurance company has to pay,

what is the amount of the lump sum that the insurance company must put

into a bank account?

O

O

A. $17,878,787.88

B. $178,787.88

O

c. $178,787,878.80

O

D. $1,787,878.79

Answer 1

The correct option is D,$1,787,878.79

Explanation:

The the formula to calculate the amount the insurance company must put into a bank account is by using the present value of a a stream of cash flow in perpetuity.

By perpetuity I mean a particular amount that pays a sum of money forever.

In this case,the amount required is meant to Earl's family $59,000 per year forever.

pv=periodic payment/interest rate

periodic payment is $59,000

interest rate 3.3%

pv=$59,000/3.3%=$1,787,878.79