You can invest in a? risk-free technology that requires an upfront payment of $1.13 million and will provide a perpetual annual cash flow of $115,000. Suppose all interest rates will be either 9.5% or 5.2% in one year and remain there forever.
The risk-neutral probability that interest rates will drop to 5.2% is 90%. The one-year risk-free interest rate is 7.9%, and today's rate on a risk-free perpetual bond is 5.7%. The rate on an equivalent perpetual bond that is repayable at any time (the callable annuity? rate) is 8.9%.
a. What is the NPV of investing today?
The NPV is _____?$. ?(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 0 NPV <0 so (invest now or wait)