Perpetuity Value
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- Perpetuity value
- $20,000.00
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| Perpetuity value | 20,000 |
formula-map diagram
- Perpetuity value
- $20,000.00
Formula breakdown
Formula
PV = Payment ÷ Discount rate= 20000
Note
This is a simplified financial model for educational purposes and does not constitute financial advice.
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What is a perpetuity and how is its value calculated?+
A perpetuity is a stream of equal payments that continues indefinitely with no end date; its present value is calculated simply by dividing the periodic payment amount by the discount rate, since the payments never stop.
Why does a never-ending stream of payments have a finite present value?+
Because of discounting, payments far enough in the future are worth almost nothing in today's terms, so even though the payments continue forever, the sum of all their discounted values converges to a finite number.
How sensitive is the perpetuity value to the discount rate?+
Very sensitive, especially at low rates — since the formula divides by the rate, a small change in the discount rate produces a large change in the calculated value, more so than in finite-period valuations.
What real-world financial instruments resemble a perpetuity?+
Certain preferred stocks with no maturity date, some government consols historically issued by the UK, and conceptually, real estate valued on the assumption of indefinite rental income, are commonly modeled using the perpetuity formula.
How is a growing perpetuity different from a standard perpetuity?+
A growing perpetuity assumes the payment increases at a constant rate each period rather than staying flat, which requires subtracting that growth rate from the discount rate in the denominator, and it is only valid when the discount rate exceeds the growth rate.