Time Value of Money
Self-Paced Overview
Perpetuities
PerpetuityPerpetuity:Cash flow with no fixed time horizon. is a cash flow without a fixed time horizon.
For example, if someone were promised that they would receive a cash flow of $400 per year until they died, that would be a perpetuity. To find the present value of a perpetuity, simply take the annual return in dollars and divide it by the appropriate discount rate. To illustrate this:
If someone were promised a cash flow of $400 per year until they died and they could earn 6% on other investments of similar quality, in present value terms the perpetuity would be worth $6,666.67.
or,
($400 ÷ .06 = $6,666.67)