An insurance policy promises to pay you and your heirs $2,500 per year forever, should you...

An insurance policy promises to pay you and your heirs $2,500 per year forever, should you become ill. How much would you pay for this policy today if the cost of capital (or rate of return) is 6% and you are factoring 2% growth?

Expert Solution

The present value of this will be given as

PV = 2500 x (1+0.02)/(0.06 - 0.02) = 63750

Hence, I will be willing to pay upto $63750

jeff jeffy answered 2 years ago

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