Perpetuities

In layman word, perpetuities are payment that given forever.

PV = PMT/i

If the periodic payment (PMT) grow by 3% per year due to inflation, the formula will be

PV= PMT/(i-g)

PV= present value

PMT=payment

i = interest rate

g= growth rate

eg: Find the PV of $300 payment for an indefinite time at the interest rate of 10%

PV= 300/ 0.1

NOTE that here we use 0.1 for 10% instead of 10, only when you key in [I/Y] you put 10 for 10%.

If the payment grow by 3% per year due to inflation, calculation will be

PV= 300/(0.1-0.03)

NOTE: 0.03 to indicate 3%