contador Saltar al contenido

Difference between annuity and perpetuity

One of the universally accepted facts that money has a temporal value, ie a rupee has a higher value today, than a year later. The time value of money useful for determining the value of financial assets. There are two techniques used in this context, namely annuality and perpetuity. The rent, can be defined as a series of cash flows, usually of a fixed amount, paid / received at regular intervals. The interval can be annual, half-yearly or quarterly, monthly, etc.

Perpetuiton the other hand, a type of rent that continues for an infinite number of years. also known as perpetual income.

In other words, the Annuit has a definite purpose, but the Perpetuit never ends, undefined. After a thorough analysis of the two methods, we have compiled the differences between Annuity and Perpetuity, to help you understand the two terms quickly and clearly.

Comparative graph

Basis for annual comparison and peruit
Sense A chain of regular cash flows up to a certain period of time known as annuity. A series of cash outlets that goes on forever known as Perpetuity.
Term Specified Endless
Payment Done or received Done
Future value It can be calculated with the help of compounding. It cannot be calculated
Example Life insurance premium per year. Dividend of irredeemable preferred shares.

Definition of annuality

The constant periodic cash flows, in a given period, are known as annuities. Cash flows can be collections or disbursements of the same amount made at a pre-established time interval, ie weekly, monthly, quarterly, half-yearly or annual. The following are the types of life annuities:

  • Ordinary income: payment or deposit of cash takes place during the year.
  • Annuity due: the inflow or outflow of money occurs at the beginning.
  • Perpetuit: the rent that eternal.
  • Others: some other types of annuities are fixed and variable annuities.

Formula:

Where, n = number of years R = Rate of return

Examples: payment of the installment to the bank for recurring deposit.

Definition of Perpetuit

An indefinite series of payments of the same amount at regular intervals on a fixed date known as Perpetuity. The word "Perpetuit" is a combination of two terms of perpetual rent, that is, a form of rent that goes on to infinity and therefore its future value cannot be calculated. Thus, a continuous flow of substantial cash flows over the years.

First of all, the initial fund, ie the capital, is established and therefore the flows of payments from the funds for an infinite period. These fixed cash flows are annual interest payments. Start on a particular date and last forever. The perpetuit divided into two categories:

  • Perpetuit constant: it remains constant over the years
  • Growing Perpetuit: grows at a uniform rate forever.

Formula:

Where, C = Cash Flow, ie Interest or Dividends R = Interest Rate G = Growth Rate

Example: scholarships paid to the endowment fund.

Key differences between rents and perpetuity

The following are the main differences between annuality and perpetuity:

  1. A series of continuous cash flows of the same amount over a limited period known as an annuity. Perpetuity is a type of income that continues forever.
  2. The annuality for a fixed period, but the eternal Perpetuit.
  3. In an annuity, payment is made or received. Vice versa, forever, only the cash outflow l.
  4. The future value of the annuity can be easily calculated, which is not possible in the case of Perpetuit.
  5. Perpetuity a life annuity, but a non-perpetual income.

Conclusion

The time value of money says that the value of a rupee at the moment will change in the future. Annuity and annuity methods are used to calculate the value of financial assets such as shares, bonds, bonds and bank deposits. Traditional annuities, payment of annuities, mortgage payments are some examples of an annuity that will provide uniform and predictable returns for a limited number of years. On the other hand, rents, share dividends of companies are examples of perpetuity.