An Insurance company has just approached you with a proposal that they consider as a good deal, "You are to pay them $150 a year for 8 years and they will pay you $150 a year thereafter in perpetuity." If this is a fair deal, what is the rate of interest?
If this a fair deal then the Future Value of the amount deposited should be equal to the Present Value of the annuity received.
Let r be the interest rate.
The present value of the perpetuity is 150/r ( the formula is ...
The solution explains how to calculate the implied interest rate between annuity payments and perpetuity returns