Present Value of a Perpetuity

A perpetuity is a type of annuity that pays equal cash flows that occur periodically such as monthly, quarterly or annually for an infinite period of time.

The present value of an annuity is calculated using the following formula:

$PV = \frac{A}{r}$

Where:

• A is the annuity payment
• r is the interest rate

Let's look at a practical example:

Assume that an perpetuity pays $500 per year. The rate of return is 8%. The present value of this perpetuity is calculated as follows:

$PV = \frac{500}{0.08} = 6,250$