Growing Perpetuity

Posted in Finance, Accounting and Economics Terms, Total Reads: 2155
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Definition: Growing Perpetuity

A growing perpetuity is one in which the periodic payments increase at a constant growth rate and are received for an infinite amount of time.

The present value of a growing perpetuity can be calculated as follows,

Formula

Present value of growing perpetuity=(payment after first period)/(Discount rate-growth rate)

Growing perpetuities can be used to find the present values of investment returns or dividends taking inflation into account for future payments.

For example, if the perpetuity entitles to a payment of amount $100 at the end of first yea that will be grow at a rate of 5% annually. The present value of this growing perpetuity discounted at a rate of 15% will be given as

Present value = 100/(0.15-0.05)=100/0.10=$1000


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