Page 358 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 14

6.2 Perpetuities

While an annuity is a constant annual cash flow for a set number of years, a
perpetuity is a constant annual cash flow which continues indefinitely. It is often
described as a cash flow continuing ‘for the foreseeable future’.

PV = Annual cash flow × Perpetuity factor

The perpetuity factor can be calculated as:

1
Perpetuity factor = ——
r

Test your understanding 10

An investment of $50,000 is expected to yield $5,760 per annum in perpetuity.

Calculate the net present value of the investment if the cost of capital is 9%

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