Question

Ch 05: Assignment Time Value of Money 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? Check all that apply. □ 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 A perpetuity is a stream of regularly timed, equal cash flows that continues forever A perpetuity is a stream of unequal cash flows. The value of a perpetuity is equal to the sum of the present value of its expected future cash flows

Answer 1

Perpetuity pays equal amount of payment with periodic interval for indefinite time.

Formula for calculation of Present value of perpetuity

Value of a perpetuity = C/ r

Where,

• Value of a perpetuity is the sum of the present values of its expected future cash flows at the time (t=0)
• Periodic withdrawal C (at regular interval)
• Interest rate r per period

Therefore, the characteristics of perpetuity are followings (true statements) -

• A perpetuity is a stream of regularly timed, equal cash flows that continues forever
• The value of perpetuity is equal to the sum of the present values of its expected future cash flows.

Other statements are not true about perpetuity