Conditions for Consistent Valuation of a Growing Perpetuity

Abstract

Using the model proposed by Velez-Pareja (2006) and assuming straight line depreciation we examine the conditions to assure a constant growth rate in a growing perpetuity. Our findings are that in practical terms for a growing perpetuity there are two options: either depreciation life is one year or there is no depreciation at all.

The practical implication of this is that we have to find approximations when calculating terminal values in valuing cash flows. We examine some models and compare them with the theoretical model proposed in this note.

In the last part of this note we pose questions rather than solutions. We invite the reader to answer those questions and even to pose additional ones.

Keywords: Perpetuities, terminal value

JEL Classification: D61, G31, H43