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You can invest in a risk-free technology that requires an upfront payment of $1 million and will provide a perpetual annual cash flow of $80,000. Suppose all interest rates will be either 10.0% or 5.0% in one year and remain there forever.

The risk-neutral probability that interest rates will drop to 5.0% is 90%.

The one-year risk-free interest rate is 8.0%?, and? today's rate on a risk-free perpetual bond is 5.4%.The rate on an equivalent perpetual bond that is repayable at any time? (the callable annuity? rate) is 9.0%.

a. What is the NPV of investing? today?

The NPV is _____?$. ?(Round to the nearest? dollar.)

b. What is the NPV of waiting and investing? tomorrow?

The NPV if the rate goes up is______?$. ?(Round to the nearest? dollar.)

The NPV if the rate goes down is ?______$. ?(Round to the nearest? dollar.)

The PV is______?$. (Round to the nearest? dollar.)

c. Verify that the hurdle rate rule of thumb gives the correct time to invest in this case.

The hurdle rule is______?$. ?(Round to the nearest? dollar.)

The NPV less than 0NPV ?, so (invest now or wait)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92754804

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