Risk-free technology-provide perpetual annual cash flow

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Reference no: EM131523744

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 <0, so (invest now or wait) ????

Reference no: EM131523744

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