Overview

A perpetuity is a stream of indefinite cash flow payments or annuity with no end date. When performing a business valuation, perpetuities can be used to determine the present value of a company's future cash flows and its terminal value, assuming that the company will continue to perform at the same rate in the future.

While the total value of a perpetuity is infinite, there is limited present value of a stream of indefinite cash flows. This finite present value of perpetuity equals to the estimates enterprise value of a company if it continues to perform at the consistent rate.

The formula for calculating the present value of a perpetuity is as follows:

PV = C / r

Where

C = amount of continuous cash payment

and

r = interest rate

Alternatively, if a company is expected to grow indefinitely into the future, its present value would be calculated as a perpetuity with growth:

PV = C / (r - g)

Where C = amount of continuous cash payment, r = interest rate and g = growth rate

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