All 34 Capital Budgeting questions
More in Capital Budgeting
What is the cost of capital and how is it used as the discount rate? How is risk incorporated into capital budgeting decisions? How do taxes and depreciation (capital allowances) affect project cash flows? How do you appraise projects with unequal lives? How do you estimate the incremental cash flows for a replacement decision? What is the modified internal rate of return (MIRR) and why use it? How do real options add value in capital budgeting? How does post-audit (post-completion review) improve capital budgeting? How do you appraise a project under capital rationing with divisible projects?
Advertisement
Back to results for “Cash Budgeting”
Budgeting & Forecasting › Capital Budgeting

What is a perpetuity and how is it valued?

Advanced

Answer

A perpetuity is a constant cash flow continuing indefinitely. Its present value is cash flow / r (for a level perpetuity) or, for a growing perpetuity, cash flow / (r - g). Perpetuity formulas are used for terminal values and valuing long-lived income streams in appraisal and valuation.
PV of 5,000/yr forever at 10% = 5,000 / 0.10 = 50,000.
Real-world example A terminal value is estimated as a growing perpetuity of the final year's cash flow.

Common follow-ups: What is the growing perpetuity formula? | Where is it used?

Capital Budgeting Cash Budgeting Capital Budgeting
All 34 Capital Budgeting questions