Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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.](https://content.bartleby.com/qna-images/question/d2e6bca0-5751-4e3b-9150-515606817feb/ad4c2e40-4ef3-4325-9f54-e7fdcec7e5a9/93pbl9_processed.jpeg)
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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