Economics Time Value Of Money Questions Long
The formula for calculating the present value of a perpetuity due payment is as follows:
PV = PMT / r
Where:
PV = Present Value
PMT = Perpetuity due payment
r = Discount rate or interest rate
In a perpetuity due, the payment is made at the beginning of each period, rather than at the end. This means that the first payment is received immediately, and subsequent payments are received at the beginning of each period.
To calculate the present value, we divide the perpetuity due payment (PMT) by the discount rate (r). The discount rate represents the opportunity cost of investing the money elsewhere or the required rate of return.
It is important to note that the perpetuity due payment should be a constant amount received at the beginning of each period, and the discount rate should be consistent with the timing of the payments (i.e., if the payment is annual, the discount rate should be an annual rate).
By using this formula, we can determine the present value of a perpetuity due payment, which represents the current worth of the future cash flows received at the beginning of each period.