## Definition of Perpetuity

Perpetuity means indefinitely. In corporate finance terms, the perpetuity is often used in bonds that pay interest forever. The perpetual bonds pay interest every year that has not a defined maturity date. This is a reason that perpetual bonds are classified as equity instead of debt.

Another important characteristic is that the rate of return is very nominal on perpetual projects. For theoretical purposes, there are some projects that generate cash flows forever.

#### Example of Perpetuity:

A project costing \$5.0 million that generates \$300,000 every year in perpetuity. Assuming the discount rate of 7% per annum, the present value of the project-related cash flows will be

PV = \$300,000/7% = \$4,285,714

Based on this evaluation the NPV of this project is negative \$714,286 (\$4,285,714 - \$5,000,000). This means that the project is looking attractive due to its perpetual nature of cash flows, but should not be accepted as it results in a negative NPV.