A perpetual annuity is a person that lasts continuously within a predetermined period of time. The distance between each payment is the same, like every month, every three months, or every year. In finance, the perpetual annuity is usually used in valuation methodology to determine the value of a company’s cash flow when it is discounted back to a certain level.
How to Calculate perpetual annuity
The basic method used to calculate perpetual annuities is to divide cash flows by several discount rates. The formula used to calculate terminal values in cash flow flows for valuation purposes is a little more complicated. This is the estimated cash flow in the 10-year company, multiplied by one plus the company’s long-term growth rate, and then divided by the difference between capital costs and growth rates. Simply put, the terminal value is the amount of cash flow divided by several discount rates, which is the basic formula for perpetual annuity.