Perpetuity Calculation Examples Help

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Concept of Perpetuity Calculation

There are different types of annuity. Annuity means a fixed amount of money is paid each year. Perpetuity means lifetime. It is a type of annuity in which a constant payment is to be made periodically for an infinite amount of time. There is no end. The face value of perpetuity is infinite but the present value of perpetuity is finite. The present value of perpetuity is the sum of the discounted value of each periodic payment of the perpetuity. It can be determined by using a formula.
The following formula is used to calculate the present value of perpetuity
Present Value (PV) of Perpetuity = A/r
A is the fixed sum of money paid periodically
r is the interest rate or discount rate per compounding period.

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Perpetuity Calculation Examples Explanation

Let’s understand the concept with help of an example.
Example: Calculate the present value on Jan 1, 2017 of a perpetuity paying $1,000 at the end of each month starting from January 2012. The monthly discount rate is 0.8%.
Periodic Payment A = $1,000
Discount Rate i = 0.8%
Present Value PV = $1,000 ÷ 0.8%
= $125,000
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