Alfa life insurance co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. if the guaranteed rate of return on this investment is 3.6 percent, how much will you pay for the policy?

Calculation of the value of the investment:

It is given that Alfa life insurance co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever and the guaranteed rate of return on this investment is 3.6 percent. Using the present value of perpetuity formula, the value of the investment can be calculated as follows:

Value of the investment = Annual Return / Rate of Return

= 10,000 / 3.6%

= 277,777.78

Hence you should pay $277,777.78 for this investment.