A friend who owns a perpetuity that promises to pay $1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of $1,000.
In order to value perpetuity, received dividend must be divided by discount rate as;
= 1000/10% = $10,000, the dividend will value $10,000 today.
At an interest rate of 10%, should you pay the $1,000 today to receive payment numbers 26 and onwards?
Actually No, because in this case perpetuity being worth $10,000 today, assuming discount rate remain unchanged in the 25th year. Now discounting back the investment, then;
= 10000(1.10)25 = $922.26; investment worth this amount today after discounting back all infinite payments of $1,000 starting in 26th year.
So, I think it has no sense to pay $1,000 for an investment that worth only $922.96 at the given 10% discount rate.
What does this suggest to you about the value of perpetual payments?
The value of perpetuity payments will be constant at $10,000 assuming discount rate being constant but investor must also consider present value of investment through comparing price in dollars today with the intrinsic value of investment.