Economics Time Value Of Money Questions Long
The formula for calculating the future value of a perpetuity payment is as follows:
Future Value = Payment / Interest Rate
In this formula, the "Payment" refers to the amount of money received or paid at regular intervals, such as an annual payment or a monthly payment. The "Interest Rate" represents the rate of return or discount rate applied to the perpetuity payment.
It is important to note that a perpetuity is a stream of cash flows that continues indefinitely, with no end date. Therefore, the future value of a perpetuity payment represents the total value of all future payments received or paid over an infinite time horizon.
To calculate the future value, divide the payment amount by the interest rate. This formula assumes that the perpetuity payment is received or paid at the end of each period.
For example, let's say you have a perpetuity payment of $1,000 per year and an interest rate of 5%. Using the formula, the future value would be:
Future Value = $1,000 / 0.05 = $20,000
Therefore, the future value of this perpetuity payment would be $20,000. This means that if you were to receive or pay $1,000 per year indefinitely, with a 5% interest rate, the total value of all future payments would amount to $20,000.