Question

Perpetuities are also called annuities with an extended, or unlimited, life. Based on your understanding of perpetuities, answer the following questions. Which of the following are characteristics of a perpetuity?
a. The value of a perpetuity cannot be determined.
b. The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows.
c. The value of a perpetuity is equal to the sum of the present value of its expected future cash flows.
d. A perpetuity is a stream of regularly timed, equal cash flows that continues forever.

Answer 1

Answer:

d. A perpetuity is a stream of regularly timed, equal cash flows that continues forever.

Explanation:

A perpetuity refers to a future stream of cash flows, paying a constant amount regularly till forever. Such stream is never ending.

The present value of a perpetuity is computed by dividing the constant amount receivable till forever, by required rate of return/cost of capital.

Present value of a growing perpetuity is given by

= $\frac{Cash\ Flow(1\ +\ g)}{r\ -\ g}$

wherein cash flows represent cash flows receivable growing at g% rate till forever

r = required rate of return or cost of capital

g= growth rate of cash flows

Where the cash flows are of constant amount i.e non growing nature, the present value of such a perpetuity is given by,

= $\frac{Cash\ Flows}{Required\ rate\ of\ return}$