Curly's Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If the required return on this investment is 6 percent, how much will you pay for the policy?
Value of a Perpetuity:
A perpetuity is a series of annual (periodic) cash flows that occur for ever. The cash flows may be equal or growing at some rate. The value of perpetuity is the present value of all the payments discounted at the required rate of return.
Answer and Explanation:
The policy should cost $500,000
- Annual payment, A = $30,000
- Rate of interest, r = 6% = 0.06
The price of policy should be the present value of all...
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fromChapter 6 / Lesson 4
This lesson defines and explains what a perpetuity is. It also provides examples of perpetuities and introduces a formula to calculate the present value of a perpetuity.