What is meaning of perpetuity, Financial Management

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What is meaning of Perpetuity

If annuity is expected to go on forever then it is known as a perpetuity and then the above formula reduces to:

Present value: A/i

Perpetuities aren't very common in financial decision making as no project is expected to last forever however there could be a few instances where returns are expected to be for a long indeterminable period. Particularly when calculating the cost of equity perpetuity concept is very useful.

For a growing perpetuity formula changes to:

Present value: A / i-g

All these calculations take into consideration that cash flow is coming at the end of the period.

 


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