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.

---

Definitions:

Erosional Remnant

A mountain or hill that remains when adjacent areas have eroded to lower levels.

Anticline

A type of fold in sedimentary strata that resembles an arch, with the oldest beds at its core.

Syncline

A fold in sedimentary strata that resembles a trough, where the youngest rocks are at the core of the fold.

Crust Thickness

The measure of the depth or the vertical extent of the Earth's crust, varying between oceanic and continental regions.