contestada

How much life insurance would a person buy if he wants to leave enough money to ensure that their family will receive $40,000 dollars in interest, of constant year 0 value dollars? The interest rate expected from banks is 7.5 percent and the inflation rate is expected to be 3 percent per year.

Respuesta :

Answer:

amount of insurance required = $888888.889

Explanation:

given data

cash flow = $40000

expected return = 7.5%

inflation rate = 3%

to find out

amount of insurance required

solution

we get here amount of insurance required that is equal to present value of perpetuity ..................1

so it will be

amount of insurance required = Cash flow ÷ (expected return - inflation rate)   ....................2

put here value we get

amount of insurance required = [tex]\frac{40000}{0.075-0.03}[/tex]

amount of insurance required = $888888.889

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