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Rate on an equivalent perpetual bond

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A risk-free project requires an upfront cost of $1 million and generates annual cash flow of $90,000 in perpetuity. Interest rates will either be 10% or 5% in one year and remain there forever with 90% chance of dropping to 5%. The one-year risk-free rate interest rate is 8% 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 is 9%. Should you invest in this project today, or wait and see if rates drop and then invest? Clearly prove and state why.

Reference no: EM132558683

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