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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)

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