Question

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is 4.7 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.) Present value

Answer 1

In this example we need to find out the present value of a perpetuity.
Perpetuity refers to a type of annuity in which infinite number of payments are received.

The formula for the present value of a perpetuity payment is as follows

PV = C/r

where, C is the payments received = $35000
r = required rate of return = 4.7%

PV= 35000 / 0.047
   = $744680.85

Present value or the payment to be made is $744680.85.