A retirement insurance product pays you $4,000 per year forever. Assume the interest rate will remain unchanged at 9% p.a. What would be the fair price for the product in today's value ?

Round your answer to TWO decimal places (Ignore $ sign and ignore cashflow direction).

Question

A retirement insurance product pays you $4,000 per year forever.  Assume the interest rate will remain unchanged at 9% p.a. What would be the fair price for the product in today's value ?

Round your answer to TWO decimal places (Ignore $ sign and ignore cashflow direction).

BlackTom AI · Accepted Answer

This is a perpetuity problem, where a fixed payment is received forever and the discount rate stays constant.

Step 1: Recognize the present value of a perpetuity formula. When a payment P is received each period indefinitely, the present value (PV) is P / r, where r is the annual interest rate.

Step 2: Identify the given values. The annual payment is 4,000 dollars and the interest rate is 9% per year, i.e., r = 0.09.

Step 3: Apply the formula. PV = 4,000 / 0.09.

Step 4: Compute the division. 4,000 ÷ 0.09 = 44,444.444... dollars.

Step 5: Round to two decimal places as required. 44,444.444... rounds to 44,444.44.

Notes: The instruction to ignore the dollar sign and cashflow direction does not affect the arithmetic here, since we are computing the present value of a steady stream of cash inflows.

BFIN011 Week 4 Online Assessable Quiz - 45 minutes |LA001

A retirement insurance product pays you $4,000 per year forever. Assume the interest rate will remain unchanged at 9% p.a. What would be the fair price for the product in today's value ? Round your answer to TWO decimal places (Ignore $ sign and ignore cashflow direction).

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