TVM
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $25,000 per year forever. If the required return on this investment is 7.2 percent, how much will you pay for the policy?
Homework Answers
The formula for the present value of a perpetuity payment is as follows
PV = C/r
C: payment received
r: requried rate of returns
In this case:
The payment received= $ 25,000
Required rate of return= 7.2%
PV= 25000/7.2%= $347,222
=> I need to pay $347,222 for the policy
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