The Maybe Pay Life Insurance Co is trying to sell you an inv

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $36,000 per year forever. Suppose a sales associate told you the policy costs $481,000. At what interest rate would this be a fair deal? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Solution

Interest rate = Annual income / Investment cost = 36000 / 481000 = 0.0748 or 7.48%

Thus, if rate of interest is 7.48% then it will be a fair deal.