Sometimes, we come across a payment that pays you for an infinite period. This is called as Perpetuity. The Present Value of Perpetuity (PVP) is given below.
Let us take an example and see how to solve this problem manually and by Microsoft EXCEL (R).
EXAMPLE
An annuity pays $150 each year for an infinite period. For these cash flows, the appropriate discount rate / year is 10%. What is the present value of this perpetuity?
From the above statement, it is understood that if we Invest $X today, it is going to give us back $150 every year forever at a rate of 10%. Now we have to calculate $X.
INPUT | |
Annual Payment | $150 |
Discount Rate | 10% |
Periods (years) | 150 |
PVP Using the Formula | $1,500.00 |
PVP Using Excel PVP Function | $1,500.00 |
You will get a negative value in the answer as it is considered as an Investment Activity. Hence we have to Negate this value by putting a negative sign.