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Proper valuation of perpetuities in an inflationary environment without real growth

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  • Ignacio Velez-Pareja

Abstract

We examine the proper valuation of perpetuities without real growth. The case of a pure" non growing perpetuity (zero real growth and zero inflation) is of academic interest but in practice it might be difficult to find. The findings contradict what is generally accepted in the literature. In particular we examine the textbook formula for calculating the value of a perpetuity.When working with perpetuities we are in presence of a Chinese box: we have found that when working with perpetuities in a scenario of non zero inflation and zero real growth value increases with inflation. On the other hand, the textbook formula for calculating a non growing perpetuity in the same scenario under values the value of the perpetuity by relevant amounts."

Suggested Citation

  • Ignacio Velez-Pareja, 2007. "Proper valuation of perpetuities in an inflationary environment without real growth," Proyecciones Financieras y Valoración 4319, Master Consultores.
    • Handle: RePEc:col:000463:004319
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    Keywords

    WACC; perpetuities; terminal value; tax savings;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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