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Perpetuity 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. |
| ( $400 / .06 = $6,666.67 ) |
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