How much life insurance would a person buy if he wants to leave enough money to...
How much life insurance would a person buy if he wants to leave
enough money to ensure that their
family will receive $50,000 dollars in interest, of constant year 0
value dollars? The interest rate
expected from banks is 10 percent and the inflation rate is
expected to be 4 percent per year.
Choices are:
500,000
1,250,000
$833,333
$866,667
Homework Answers
Amount of insurance required = Present value of perpetuity
= Next Cash flow/(required return - growth rate)
= 50,000/(10%-4%)
= $866,666.67
Hence, the answer is $866,667
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