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calculation of the present value through the use of short-cut formulas. Download free ebooks at bookboon.com
13 Corporate Finance Present value and opportunity cost of capital Perpetuity
Security with a constant cash flow that is (theoretically) received forever. The present
value of a perpetuity can be derived from the annual return, r, which equals the
constant cash flow, C, divided by the present value (PV) of the perpetuity: r C
PV Solving for PV yields:
(7) PV of perpetuity C
r Thus, the present value of a perpetuity is given by the constant cash flow, C, divided by
the discount rate, r. In case the cash flow of the perpetuity is growing at a constant rate rather than being constant, the present
value formula is slightly changed. To understand how, consider the general present value formula: PV C3
(1 r ) (1 r )
(1 r ) 3 Turning a challenge into a learning curve.
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