Present Value of a Growing Perpetuity Formula

Formula

PV = Pmt / (i - g)
Variables used in the annuity formula
PV = Present Value
Pmt = Periodic payment
i = Discount rate
g = Growth rate

Use

The present value of growing perpetuity formula shows the value today of series of periodic payments which are growing or declining at a constant rate (g) each period. The payments are made at the end of each period, continue forever, and have a discount rate i is applied.

A growing perpetuity is sometimes referred to as an increasing perpetuity or graduated perpetuity.

The formula discounts the value of each payment back to its value at the start of period 1 (present value).

When using the formula, the discount rate (i) must be greater than the growth rate (g).

Present Value of a Growing Perpetuity Formula Example

If a payment of 6,000 is received at the end of period 1 and grows at a rate of 3% for each subsequent period and continues forever, and the discount rate is 6%, then the value of the payments today is given by the present value of a growing perpetuity formula as follows:

PV = Pmt / (i - g)
PV = 6,000 / (6% - 3%)
PV = 200,000

The present value of a growing perpetuity formula is one of many used in time value of money calculations, discover another at the links below.

Present Value of a Growing Perpetuity Formula November 6th, 2016Team

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