Stock pays annually an amount of rupees 10 from 6th year onwards what ...
Calculating the Present Value of a Perpetuity
Understanding the Problem
Before we can calculate the present value of the perpetuity, we need to understand the problem. Here are the details:
- The stock pays annually an amount of rupees 10 from the 6th year onwards.
- The rate is 20%.
Formula for Present Value of a Perpetuity
Now that we understand the problem, we can use the formula for the present value of a perpetuity:
Present Value of a Perpetuity = Cash flow / Interest rate
Calculating the Present Value of the Perpetuity
Using the formula, we can calculate the present value of the perpetuity:
Present Value of a Perpetuity = 10 / 0.20
Present Value of a Perpetuity = 50
Interpreting the Results
The present value of the perpetuity is rupees 50. This means that if you invest rupees 50 today at a rate of 20%, you will receive rupees 10 every year from the 6th year onwards.
Conclusion
Calculating the present value of a perpetuity is a simple process. All you need is the cash flow and the interest rate. Once you have these values, you can use the formula to calculate the present value of the perpetuity.