You have two contracts available to you: ONE is a perpetuity with cash

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.

ANSWER

A