Corp Finance

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Corporate Finance

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Discounted Cash Flow Valuation

Both annuities and perpetuities are forms of payments schedules which are made at regular time intervals and they are mostly used by banks and corporations in the settlement of debt . These payment schedule types take into consideration the value of money and annuity compensation However , a difference exists between an annuity and perpetuity . An annuity refers to a series of standard payments whose payments come to a stop in the future . Moreover

, it is normally reliant on the individual 's continued existence . These regular payments can be made at the beginning of each period and this in known as an annuity in advance or else it can be an annuity in arrears , that is , the payment is done at the end of each period . On the other hand , perpetuity , though a progression of regular payments either at the start or end of each time period , payment goes on forever (Smith , 2008 . Additionally , the payments in perpetuity vary with the inflation rate and the market interest rate . While the payments in perpetuity vary , those of an annuity remain constant . These divergences are vital in the computation of the future values of the instruments . This is because while the annuity 's future value is a sum of each payment 's future value calculated using a predetermined geometric sequence , perpetuity 's future value remains to be a function of the rate of inflation and the market rate of interest...