What is the present value of an annual payment of $80,000 that is received in perpetuity if the discount rate is 9%

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05-07-2022
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What is the present value of an annual payment of $80,000 that is received in perpetuity if the discount rate is 9%

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tripatsingh039 tripatsingh039 · Answer 1 · 2022-07-16T01:37:08-04:00

$888,888.88 is the present value of an annual payment that is received in perpetuity after the discount rate of 9%

Procedure:

PV of Perpetuity = ICF / r

Here, the identical cash flows are regarded as the ICF.

The interest rate or the discounting rate is expressed as r.

PV = ICF / r

PV = 80,000 / 9%

PV = $888,888.88

Hence, the present value in perpetuity is $888,888.88.

About Present Value of Perpetuity:

Perpetuity is the revenue stream that a person receives for an indefinite amount of time, and its present value is determined by discounting identical future cash-flows using a certain discounting rate. Although the cash flows in this case are endless, their present value is only of limited worth.

A revenue stream that has an unlimited life is called perpetuality, and it rises at a proportionate pace. The cash flows ought to be the same. The dividend growth model is basically where the formula comes from. The terminal value of the identical cash-flows is calculated using the formula.

Know more about cash-flows here:

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