The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $22,000 per year forever. If the required return on this investment is 5.80 percent, how much will you pay for the policy?

This cash flow is a perpetuity. To find the PV of a perpetuity, we use the equation:

PV = C / r
PV = $22,000 / 0.0580 = $379,310.34

Dinero Bank offers you a $68,000, four-year term loan an annual interest rate of 7 percent. What will your annual loan payment be?

Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the PVA equation:

PVA = C({1 − [1/(1 + r)^t ] } / r)
$68,000 = C{[1 − (1/1.0700^4 ) ] / 0.0700}

We can now solve this equation for the annuity payment. Doing so, we get:

C = $68,000 / 3.38721 = $20,075.51