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regular time interval for specific time. The payment can be made at the
beginning of every time interval or at the end depending on the type of
annuity.
Perpetuity is the series of payments that continue for an indefinite period of
time.
Perpetuity is a type of annuity where the payment is made or received forever.
Here the cash flows will be continued for infinite time period. This type of
annuity is used to calculate fair value of an investment by discounting all the
future expected cash flows generated from that investment. Perpetuity is
valued using the actual interest rate.
The present value of the security with perpetual cash flows is calculated by;
PV= C/(1+r)1 +C/(1+r)2 ....
1. Time value of money helps in making a judicial and rational decision with
respect to money and investment. Time value of money evaluates the factors
such as inflation rate, interest rate, associated risk and return. Time value of
money uses all these factors in its computation and thereby an investor can
easily make an informed financial decision.
3. The most primary importance of time value of money is based on the fact
that how time affects the value of money and this lets the purchaser to delay
the payment and on contrary seller wants to receive the payment as early as
possible because both parties know the importance of time value of money.