Different Types of TVOM

Perpetuity

For example, an insurance company has just launched a security that will pay $150 indefinitely, starting the first payment next year. How much should this security be worth today if the appropriate return is 10%? Using the time line below, complete the PV(∞) equation.

Timeline with r equals 10%, 150 at each of 1,2 3, an arrow pointing to infinity, and P V infinity equals question mark.

The equation below is used to calculate present value of perpetuity. It requires only the first payment and interest rate.


P V infinity equals numerator C denominator r
P V infinity equals numerator 150 denominator .10