This Present Value Perpetual Ordinary Annuity equation computes the amount of money accumulated if you invest a number of periodic payments and continue this investment indefinitely.
The inputs are as follows:
Real estate and preferred stock are investments that results in values represented by the perpetuity and prices for the real estate or preferred stock can be established using this equation.
To receiving money now is generally worth more than receiving the same amount in the future, primarily because you can invest it now at a compounding rate. for example, to receive $12,000 today is worth more than receiving $1,000 each month for a year. You can invest the $12,000 today at the same interest rate as you might invest each $1000 as the payments are received and the $12,000 today would earn more interest. So, receiving $12,000 today is worth more at the end of the year than receiving 12 payments of $1000 across the year.
This equation then tells you how much money today is equal to the money earned at a specified interest rate if it were received in monthly payments for perpetuity.
If the interest rate for a stock (shares) were estimated to be 11%, then a constant perpetuity per dollar of investment would be $9.09. This would be the assumed dividend income per dollar of investment.
`PV_"Annuity"` = $1000 * [1 - (1 + 0.05)^12] / 0.05 = $8,863.25
This means receiving those 12 payments across the span of the year will be worth the same amount at the end of the year as receiving $8,863.25 today.
Present Value (Ordinary Annuity)
Present Value Annuity Due
Present Value Ordinary Annuity
Present Value Perpetual Annuity Due