Question

Curly’s Life Insurance Co. is trying to sell you an investment
policy that will pay you and your heirs $28,000 per year forever.
Assume the required return on this investment is 7.6 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.)**

Policy value today $

Answer #1

This is the calculation of present value of perpetuity (forever cash flows).

Process to do: Annual amount, $28,000, should be divided by the rate of interest, 0.076, to get the policy value.

Policy value = Annual amount / Rate of interest

= $28,000 / 0.076

= $368,421.05 (Answer)

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