Why would you use a perpetual annuity and what does it do for a healthcare organization?

Expert Solution

Perpetual means something that is never-ending or long-lasting in nature. When we relate this concept with that of annuity, it means that the cash flows in terms of annuity that continues to be available forever. Hence I would use perpetual annuity with the motive to discount the future cash flows to the Present value or apply the same in determining the dividends in Dividend Discount Model. In this manner, I can use Perpetual annuity to calculate the returns in terms of its present value whenever I invest in some financial instruments such as Bonds, etc. Overall, it shall help me comprehend the time value of money pertaining to such instruments.

Even with regards to the healthcare organization, it is to be noted that the monetary resources in hand held at present is far more valuable to such Organization than it would be in the future. If Opportunity cost here, helps in explaining the concept of time value of money, then the concept of perpetual annuity could be well applied even for Healthcare Organization.

keosha answered 1 year ago

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