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Perpetuity Calculator

Calculate the present value of perpetuities using the standard financial formula PV = PMT ÷ r. Perfect for valuing dividend stocks, real estate leases, endowment funds, and other infinite cash flow instruments. Essential tool for investors, financial analysts, and corporate finance professionals. Get accurate results with proper discount rate selection and risk assessment guidance.

Calculate Perpetuity Present Value

Perpetuity Type
Annual Payment
$

The fixed amount paid annually forever

Discount Rate
%

Annual interest rate (e.g., 5 for 5%)

Payment Frequency
Quick Rate Presets

Perpetuity Present Value

$200,000.00
Present Value

Calculation Details

Annual Payment
Fixed payment amount
$10,000.00
Discount Rate
Annual interest rate
5.00%
Formula Used
Present Value = Periodic Payment ÷ Periodic Rate
PV = PMT / r
Payment Frequency
Effective annual rate: 5.00%
Annual

Sensitivity Analysis

Rate ChangeDiscount RatePresent ValueChange %
-3pp2.00%$500,000150.0%
-2pp3.00%$333,333.3366.7%
-1pp4.00%$250,00025.0%
0pp5.00%$200,0000.0%
+1pp6.00%$166,666.67-16.7%
+2pp7.00%$142,857.14-28.6%
+3pp8.00%$125,000-37.5%

Shows how present value changes with different discount rates (±1-3 percentage points)

Common Perpetuity Applications

Investment Analysis

Dividend Stocks3-5%

Stable dividend-paying companies

  • • Utility companies
  • • REITs with long leases
Government Bonds2-4%

Low-risk perpetual bonds

  • • Consols (UK)
  • • Perpetual bonds
Real Estate4-8%

Long-term lease agreements

  • • Ground leases
  • • Commercial properties

Corporate Finance

Endowment Funds5-7%

University and foundation funds

  • • Educational institutions
  • • Charitable foundations
Pension Obligations6-8%

Defined benefit pension plans

  • • Corporate pensions
  • • Government pensions
Insurance4-6%

Annuity and life insurance

  • • Immediate annuities
  • • Life insurance policies

How to Calculate Perpetuity Present Value

Perpetuity Formula

Present Value = Annual Payment ÷ Discount Rate
PV = PMT ÷ r
References: Brealey, Myers & Allen "Principles of Corporate Finance" (12th Ed.), CFA Institute Level I Curriculum

Calculation Steps:

  1. 1
    Determine the annual payment amount
    Fixed cash flow received each year
  2. 2
    Select appropriate discount rate
    Risk-adjusted rate of return (as decimal)
  3. 3
    Apply the perpetuity formula
    Divide annual payment by discount rate

Important Considerations

⚠️ Financial Disclaimer

This calculator provides estimates for educational purposes. Consult financial professionals for investment advice.

📈 Interest Rate Risk

Present value is highly sensitive to discount rate changes

  • • Small rate changes = large value changes
  • • Consider interest rate trends
  • • Use conservative estimates
💰 Inflation Impact

Real vs nominal discount rates matter

  • • Use real rates for inflation-adjusted analysis
  • • Consider purchasing power erosion
  • • Historical inflation averages 2-3%
🏢 Business Risk

Perpetuities assume infinite payments

  • • Companies can fail or change policies
  • • Economic conditions change
  • • Use higher rates for riskier assets
⚖️ Tax Considerations

Tax implications affect net returns

  • • Consider after-tax discount rates
  • • Different tax treatment for different assets
  • • Consult tax professionals

Example Cases

Case 1: Dividend Stock Investment

Input Parameters: $5,000 annual dividend
Discount Rate: 5% (0.05)
Asset Type: Blue-chip dividend stock
Present Value: $100,000
Formula: $5,000 ÷ 0.05
Use Case: Stock valuation

Analysis: This stock would be worth $100,000 if it pays $5,000 annually forever at a 5% discount rate.

Case 2: Real Estate Ground Lease

Input Parameters: $12,000 annual rent
Discount Rate: 6% (0.06)
Asset Type: Commercial ground lease
Present Value: $200,000
Formula: $12,000 ÷ 0.06
Use Case: Property valuation

Analysis: The ground lease has a present value of $200,000 based on perpetual $12,000 annual payments.

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Frequently Asked Questions

What is a perpetuity in finance?
A perpetuity is a financial instrument that pays a fixed amount of money at regular intervals forever. It's commonly used in corporate finance, real estate, and investment analysis to value assets with infinite cash flows.
What is the perpetuity formula?
The perpetuity present value formula is PV = PMT / r, where PV is present value, PMT is the annual payment, and r is the discount rate. This formula assumes the first payment occurs one period from now.
How do I choose the right discount rate?
The discount rate should reflect the risk and opportunity cost of the investment. Common rates: 3-4% for government bonds, 5-7% for corporate bonds, 8-12% for stocks, and 10-15% for high-risk investments.
What are real-world examples of perpetuities?
Examples include: dividend-paying stocks (assuming constant dividends), real estate with perpetual leases, endowment funds, pension obligations, and certain types of bonds with no maturity date.
What are the limitations of perpetuity calculations?
Perpetuities assume constant payments forever, which is rarely realistic. Inflation, changing interest rates, and business risks can affect actual cash flows. Use perpetuity calculations as a starting point for more complex valuation models.
Perpetuity Calculator