What is the npv of waiting and investing tomorrow

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Reference no: EM131936719

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)

Reference no: EM131936719

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