The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $23,000 per year forever. If the required return on this investment is 5.3 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.)
The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $23,000 per year forever. If the required return on this investment is 5.3 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.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Problem 6-10: Calculating Perpetuity Values [LO1]**
The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $23,000 per year forever. If the required return on this investment is 5.3 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:** [Input box]
---
### Explanation:
This problem involves calculating the present value of a perpetuity. A perpetuity is a type of annuity that provides an endless series of equal payments. The formula to calculate the present value of a perpetuity is:
\[ \text{Present Value} = \frac{\text{Annual Payment}}{\text{Rate of Return}} \]
Given:
- **Annual Payment** = $23,000
- **Rate of Return** = 5.3% (or 0.053 as a decimal)
So, the present value calculation would be:
\[ \text{Present Value} = \frac{23,000}{0.053} \]
This result gives you the amount you should be willing to pay for the investment policy today.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd2e6bca0-5751-4e3b-9150-515606817feb%2Fad4c2e40-4ef3-4325-9f54-e7fdcec7e5a9%2F93pbl9_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Problem 6-10: Calculating Perpetuity Values [LO1]**
The Maybe Pay Life Insurance Company is trying to sell you an investment policy that will pay you and your heirs $23,000 per year forever. If the required return on this investment is 5.3 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:** [Input box]
---
### Explanation:
This problem involves calculating the present value of a perpetuity. A perpetuity is a type of annuity that provides an endless series of equal payments. The formula to calculate the present value of a perpetuity is:
\[ \text{Present Value} = \frac{\text{Annual Payment}}{\text{Rate of Return}} \]
Given:
- **Annual Payment** = $23,000
- **Rate of Return** = 5.3% (or 0.053 as a decimal)
So, the present value calculation would be:
\[ \text{Present Value} = \frac{23,000}{0.053} \]
This result gives you the amount you should be willing to pay for the investment policy today.
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