Economics Time Value Of Money Questions Long
The formula for calculating the present value of a perpetuity is as follows:
PV = C / r
Where:
PV = Present value
C = Cash flow received per period
r = Discount rate or required rate of return
In a perpetuity, the cash flow received remains constant and is received indefinitely. The present value represents the current worth of all future cash flows discounted at the required rate of return.
For example, let's say you are considering purchasing a perpetuity that pays $1,000 per year and the required rate of return is 5%. Using the formula, the present value would be:
PV = $1,000 / 0.05
PV = $20,000
Therefore, the present value of this perpetuity would be $20,000. This means that if you were to invest $20,000 today, you would receive $1,000 per year indefinitely, assuming the required rate of return remains constant.