Present Value for Perpetuities

We present the first way of calculating present value by examining the case of a perpetuity, which is an asset like land that lasts forever and pays $N each year from now to eternity. We are seeking the present value (V) if·the interest rate is i percent per year.

where the present value is the amount of money invested today that would yield exactly $N each year. This is simply

This says’that if the interest rate is always 5 percent per year. an asset yielding a constant stream of income will sell for exactly 20 (= 1 + 5/100) times its annual income. In this case, what would be the present value of a perpetuity yielding $100 every year? At a 5 percent interest rate its present value would be $2000 (= $100 + 0.05)

[av_button label='Get Any Economics Assignment Solved for US$ 55' link='manually,http://economicskey.com/buy-now' link_target='' color='red' custom_bg='#444444' custom_font='#ffffff' size='large' position='center' icon_select='yes' icon='ue859' font='entypo-fontello']

Share This