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I did’nt understand the logic of formula-Perpetiuty= C.F/r
How 1/r becomes the perpetiuty factor.Suppose you have agreed to pay someone 5,000 a year for ever.
Instead of having to pay every year, I would rather pay one big amount now!
If the bank is paying interest of 10%, then what I can do is put $50,000 now into a bank account and that would give the person 5,000 a year interest. I could just pay out 50,000 and forget the payments of 5,000 a year.
How did I arrive at 50,000? I worked backwards – with interest of 10% then to earn interest of 5,000 a year I would need to put 50,000 in a bank account. 5,000 / 0.10.
50,000 now is equivalent (at 10%) to 5,000 a year for ever.
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