Variables
Description
What is this formula?
The Present Value of a Perpetuity calculates the current value of an infinite series of equal periodic payments.
Because the payments continue forever, the valuation depends entirely on the payment amount and the discount rate.
This is one of the most important formulas in finance and valuation theory.
When to use it
Use this formula when valuing assets or investments expected to generate constant cash flows indefinitely.
Example
Suppose:
PMT = $500 per year
i = 0.05
Formula:
PV=PMT/i
Substitution:
PV=500/0.05
PV=10,000
Result:
Present Value = $10,000
Applications
Stock valuation
Preferred shares
Real estate valuation
Business valuation
Endowment funds
Financial analysis
Note
This formula assumes that payments remain constant forever and that the discount rate remains unchanged. Real-world investments often experience growth, inflation, changing interest rates, or varying cash flows. In such cases, more advanced perpetuity growth models may be required.