Perpetuity Calculation in 6 Minutes Present
Value of a Perpetuity Formula Okay. Welcome back once again to mpabullshit.com.
So our topic for this video is value of a perpetuity. Alright. So remember you can always
go back to MBAbullshit.com for lots of cool videos to help you out with this topic.
Now before this video, you should already know future value and present value. So you
can watch my other free videos on future value and present value if you do not know these
topics yet. Alright. So let’s start with an easy question
and you’ll also [0:00:46.4] to be easy, I promise. Alright. What if you had one hundred
dollars at the bank and the bank was giving you five percent interest per year, every
year forever? Okay? So how much cash would you get every year? Okay, you get five percent.
So how much cash is that every year? That’s easy. One hundred dollars times zero point
zero five which means five percent, you will get five dollars per year. Okay, now that’s
very easy. So now let’s turn the story around. What
if you want the bank to give you five dollars per year forever? Okay? How much do you need
to deposit? Well, we already know one hundred dollars. Okay, same as here. Okay, same as
here. So now the question is what if you had a magic wand and it guarantee you that you
will get five dollars every year for the rest of your life? Okay, this is five dollars every
year for the rest of your life. Okay? If someone wanted to buy this magic wand from you, how
much will you sell it? Okay? Well, you would sell it for a certain amount of money, okay?
So that you can put this money in the bank and then you’ll continue to earn five dollars
a year forever in interest. Okay? So how much is that? Well, we already know it’s one
hundred dollars, right? You need to sell this wand for one hundred dollars so that you can
put the one hundred dollars in the bank and you can continue to earn the five dollars
a year that this wand was giving you. Alright? Simple. Very simple.
So now, I’ve got good news for you and that is that this magic wand actually exists. Okay?
Now, however it doesn’t really look like a wand. It looks like a piece of paper or
a contract and it is called a perpetuity. Alright? It’s called a perpetuity. So it
comes from the word perpetual which also means forever. So I don’t know if you’re catholic.
You know the Catholics, they pray to this is it mother of perpetual help or something
like that. I think mother Mary or no. In some Christian funerals they say, “Oh God”.
A catholic funeral they say, “God, please let your perpetual light shine upon his soul.”
It means please shine upon his soul forever. Excuse me.
Alright. So now how do we mathematically estimate the value of the magic wand or the value of
the perpetuity? Okay? How did we mathematically get the value of one hundred? Okay? So for
that we use an easy formula which looks like this. Okay? Value of a perpetuity equals the
yearly cash flow divided by the interest rate. Okay? And you already know that the yearly
cash flow is five dollars and the interest rate is five percent written mathematically
as zero point zero five, and we find that five dollars divided by zero point zero five
is one hundred dollars. So there you can see how simple it is to get the value of a perpetuity.
Alright? So now that you know the basic concept of
how to get a value of a perpetuity, you’re now ready to move on to our next video on
the value of a growing perpetuity where the cash payment increases every year. So in this
case, it was just a flat five dollars every year, and every year it was the same but what
if this increases every year to a bigger that five dollars, and then bigger the next, and
even bigger than next, next year? So that is called the value of a growing perpetuity.
And if you’re interested in this, you can check out this next video on MBAbullshit.com.
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