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
C = amount of continuous cash payment
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