Author Question: You have two contracts available to you: ONE is a perpetuity with cash flows of 500 per year, with ... (Read 77 times)

joblessjake · **on:** Jul 11, 2018

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.

Question 2

Today is your 21st birthday and your bank account balance is 25,000. Your account is earning
6.5 interest compounded monthly. How much will be in the account on your 50th birthday?

A) 159,795 B) 162,183 C) 164,631 D) 163,823