Solution: | ||
Policy value today is 316,455.70 | ||
Working Notes: | ||
Since cash receivable under the policy is forever which is nature of perpetual hence , we get value of the policy today using concept of valuation perpetual cash flow. We will pay for the policy the value of perpetual cash flow of the policy. | ||
Policy value today =Cash flow per year /required rate of return | ||
Policy value today = $25,000/ 7.9% | ||
Policy value today = 316455.6962 | ||
Policy value today = 316,455.70 | ||
Hence | You have to pay for the policy $316,455.70 | |
Please feel free to ask if anything about above solution in comment section of the question. |
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