Lessons
- Introduction - Time Value of Money
- Interest Rates
- Interest Rate Equation
- Nominal Interest Rate and Effective Yield
- Time Value of Money for Different Compounding Frequencies
- Future Value of a Single Cash Flow
- Present Value of a Single Cash Flow
- Future Value and Present Value of Ordinary Annuity
- Present Value and Future Value of Annuity Due
- Present Value of a Perpetuity
- Present Value and Future Value of Uneven Cash Flows
- Annuities with Different Compounding Frequencies
- Using a Timeline to Solve Time Value of Money Problems
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.