Company Z is offering 2 possible investments with the same level of risk. Investment A is a perpetuity. with the first cash flow, of $100.00 per year, coming in one year. Investment B is also a perpetuity, paying $100.00 per year, but its first cash flow occurs in two years.
(a) Which investment is more valuable today ? Why ?
(b) Suppose that the difference in today's prices of Investment A and Investment B is $93.46. What discount rate are investors using to value the investments? Show calculation.