The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $27,000 per year forever. Suppose a sales associate told you the policy costs $472,000. At what interest rate would this be a fair deal

5.72%

Explanation:

This involves perpetual annuity, where there are equal cash flows for infinity paid in specific durations

To find the interest rate we use the perpetuity cash flows equation.

Present value (P) = Yearly payments (Y) / Interest rate (I)

P = $472,000

Y = $27,000

I=?

So 472,000 = 27,000/I

Cross-multiply

472,000*I = 27,000

I = 27,000/472,000

I = 0.0572

Remember to express interest as percentage

I = 0.0572 * 100 = 5.72%