Concept of perpetuity
This is the concept applicable in the case of pension. Pension is taken to be perpetual. Can we find out the lump sum amount in case the pension amount is given?
Example:
Suppose the pension amount is Rs. 1000/-. The expected rate of return is 10% p.a. What is the core amount out of which interest is paid? The annual payment is Rs.12,000/-. Hence the lump sum amount is Annual payment/rate of interest expressed in decimals.
Accordingly the lump sum amount is Rs. 12,000/0.1 = Rs. 1,20,000/-.
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