What is future perpetuity?
The future
perpetuity when the installment starts in some future period. For example Mr. A
is offered $ 5000 per year forever, however, the payment start in year 6.
How to calculate the present value of
future perpetuity
Present value of future perpetuity is calculated in two
steps. In first place the perpetuity is calculated in future date and then it
is discounted to yea 0 (i.e. current year). It is important to remember that if
there start in year 6 then present value is calculated at year 5 and then it is
discounted by 5 years.
Example of future
Perpetuity
ABC Company is receiving $ 12,000 per annum from year 4. The discount rate is 8% what is the present
value of this perpetuity?
Solution
In first place the perpetuity for year 7 is calculated i.e.
(at the end of year 3)
|
Installment
|
$ 12,000
|
|
Discount Rate
|
8%
|
|
Future perpetuity
|
150,000
|
|
|
|
In second place the $ 150,000 is discounted from year three
to the present year i.e. year 0.
|
Future present value
|
$ 150,000
|
|
Discounted by three year
|
1/(1+.08)^3=1/1.2597=.7938
|
|
Present Value ( 150,000 x .7938)
|
=119,070
|
