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Discounting and investment appraisal

Discounting annuities and perpetuities

6.1 Annuities

An annuity is a constant annual cash flow for a number of years, When a
project has equal annual cash flows, the annuity factor may be used to
calculate the NPV. The annuity factor (AF) is the name given to the sum of
the individual DFs.

The present value (PV) of an annuity can therefore quickly be found:

PV = Annual cash flow × AF

–n
1 – (1 + r)
With AF = ––––––––
r

6.2 perpetuities

A perpetuity is an annual cash flow that occurs forever.

The present value (PV) of an annuity can therefore quickly be found:

PV = Annual cash flow/r

1
or PV = cash flow × –
r

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