An insurance company has made you the following retirement offer. If you pay the

Question

An insurance company has made you the following retirement offer. If you pay them $100, 000 now, you will receive payments of $8000 a year for 10 years. After this they will pay you $9000 a year forever. Recall that a "Capitalized Cost" is the amount of money that will provide annual payments indefinitely by paying out the interest. a) What is the Capitalized Cost of the $9, 000 payments in terms of variable (i) at Year 10? b) Solve for the rate of return (i) for the overall investment to the nearest 0.5%

Explanation / Answer

a.

Calculate the capitalized cost of the $9,000 payments in terms of variable (i) at year 10:

Capitalized cost = Interest / Principal *100

= $9,000 / $100,000 *100

=9%.

b.

Calculate the rate of return (i) for the overall investment to the nearest 0.5%:

= 9 + 0.5%

= 9.5%

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