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Unformatted text preview: at the end of each year forever).
It is sometimes necessary to find the present value of a perpetuity. The present
value interest factor for a perpetuity discounted at the rate i is
i (4.17) As the equation shows, the appropriate factor, PVIFAi, , is found simply by
dividing the discount rate, i (stated as a decimal), into 1. The validity of this
method can be seen by looking at the factors in Table A–4 for 8, 10, 20, and
40 percent: As the number of periods (typically years) approaches 50, these factors approach the values calculated using Equation 4.17: 1 0.08 12.50;
1 0.10 10.00; 1 0.20 5.00; and 1 0.40 2.50.
EXAMPLE Ross Clark wishes to endow a chair in finance at his alma mater. The university
indicated that it requires $200,000 per year to support the chair, and the endowment would earn 10% per year. To determine the amount Ross must give the
university to fund the chair, we must determine the present value of a $200,000
perpetuity discounted at 10%. The appropriate present value interest fac...
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