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)