You Have Two Contracts Available to You: ONE Is a Perpetuity

question 66

Multiple Choice

You have two contracts available to you: ONE is a perpetuity with cash flows of $500 per year,with the first cash flow beginning today.TWO is a perpetuity with cash flows of $500 per year,with the first cash flow beginning one year from today.Which has a greater present value if the required rate of return is 5%?

• A)Contract ONE is preferred because it has a present value that is $500 greater than contract TWO.
• B)Contract TWO is preferred because it has a present value that is $500 greater than contract ONE.
• C)Contract ONE is preferred because it has a present value that is $476.19 greater than contract TWO.
• D)Because these are perpetuities with equal required rates of return,they have equal value.