Your Neighbor Owns a Perpetuity of $100 Per Year That

Multiple Choice

Your neighbor owns a perpetuity of $100 per year that has a discount rate of 6% per year.He offers to sell to you all but the next 20 cash flows (the first to be received one year from today) for $500.In other words,he keeps the first 20 cash flows of his perpetuity and you get all of the rest.Is this a good price for you if the appropriate discount rate is 6%?

A) No,because the entire perpetuity is worth only $1,666.67 and your neighbor is taking the best cash flows worth more than $1,200 in present value terms
B) Yes,because the present value of the remaining cash flows is $519.68 and you are buying them for only $500.
C) No,because the cash flows you receive are only worth $482.16 and that is less than the $500 your neighbor is asking for the cash flows.
D) This question cannot be answered.