1. What is a Perpetuity?

A perpetuity is a type of annuity that pays an infinite series of identical cash flows with no end date. It's a financial concept used to value assets that generate constant returns indefinitely.

2. How Does the Calculator Work?

The calculator uses the perpetuity formula:

Where:

• \( PV \) — Present value of the perpetuity
• \( Cash\ Flow \) — Annual payment amount (USD)
• \( Discount\ Rate \) — Interest rate (as decimal)

Explanation: The formula discounts an infinite series of identical cash flows to their present value using a constant discount rate.

3. Importance of Perpetuity Calculation

Details: Perpetuity calculations are essential for valuing preferred stocks, certain bonds, real estate with stable rental income, and endowment funds.

4. Using the Calculator

Tips: Enter annual cash flow in USD and discount rate as a decimal (e.g., 5% = 0.05). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between perpetuity and annuity?
A: An annuity has a fixed term, while a perpetuity continues indefinitely.

Q2: What are real-world examples of perpetuities?
A: Preferred stocks with fixed dividends, some government bonds, and certain types of real estate investments.

Q3: How does growth affect perpetuity value?
A: For growing perpetuities, the formula becomes PV = Cash Flow / (Rate - Growth Rate).

Q4: Why is the discount rate important?
A: Higher discount rates result in lower present values, reflecting greater risk or opportunity cost.

Q5: Can perpetuities really last forever?
A: While nothing lasts forever in practice, the perpetuity model is useful for assets with very long durations.