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Present Value of a Perpetuity

A perpetuity is a type of annuity that pays equal cash flows that occur periodically such as monthly, quarterly or annually for an infinite period of time.

The present value of an annuity is calculated using the following formula:

PV = A/r

Where, A is the annuity payment, and r is the interest rate.

Assume that an perpetuity pays $500 per year. The rate of return is 8%. The present value of this perpetuity is calculated as follows:

PV = 500/0.08 = $6,250

If the investor invests $6,250 in the perpetuity paying 8% rate of return, he will receive a payment of $500 per year for an infinite period.

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