Curly’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs

Curly’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $31,000 per year forever. Suppose Curly’s told you the policy costs $560,000.

Required:

At what interest rate would this be a fair deal? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Interest rate

%

Explanation:

Here we need to find the interest rate that equates the perpetuity cash flows with the PV of the cash flows. Using the PV of a perpetuity equation:

PV = C / r

$560,000 = $31,000 / r

We can now solve for the interest rate as follows:

r = $31,000 / $560,000

r = 0.0554 or 5.54%