What is the npv of waiting and investing tomorrow

Assignment Help Financial Accounting
Reference no: EM132962468

Question - You can invest in a risk-free technology that requires an upfront payment of $1.11 million and will provide a perpetual annual cash flow of $111,000. Suppose all interest rates will be either 9.7% or 4.9% in one year and remain there forever. The risk-neutral probability that interest rates will drop to 4.9% is 91%. The one-year risk-free interest rate is 8.4%, and today's rate on a risk-free perpetual bond is 5.5%. The rate on an equivalent perpetual bond that is repayable at any time (the callable annuity rate) is 9.3%.

Required -

a. What is the NPV of investing today?

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

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

Reference no: EM132962468

Questions Cloud

Explain the issues associated with employment contracts : Explain the issues associated with employment contracts including the elements that "OmDose a edallvenf reeable contract.
Characteristics influence one experience of jealousy : Describe how both personal and situational characteristics influence one's experience of jealousy.
How would you record this transaction in the cash flow : Question - Cash and Cash Equivalents - As a result, the cash remained with him. How would you record this transaction in the cash flow statement
Compute the deprival value of each asset : Compute the deprival value of each asset. Explain briefly your logic and assumptions and show your workings clearly. Ignore taxation, general inflation
What is the npv of waiting and investing tomorrow : Question - You can invest in a risk-free technology that requires an upfront payment of $1.11 million. What is the NPV of waiting and investing tomorrow
What is the terminal value at the end of year : The average trailing industry P/E in year 5 is expected to be 16. The cost of equity is 11%. What is the terminal value at the end of year 5
Calculate the accumulated amount : Calculate the accumulated amount that can be obtained at the end of the time period, noting that the annual interest rate is 8%
What is the total cost to the firm of issuing the securities : The firm receives $72 per share, and the out-of-pocket expenses are $428,000. What is the total cost to the firm of issuing the securities
What were the proceeds for the issuer and the underwriter : The company's investment bank demanded a spread of 14 percent of the offer price, What were the proceeds for the issuer and the underwriter

Reviews

Write a Review

Financial Accounting Questions & Answers

  What is meant by noncash utilization

What is meant by "noncash utilization"? Provide the balance sheet disclosure for the restructuring obligation on January 1, 2005.

  Does the company have leases where they are the lessee

Does the company have leases where they are the lessee? Are the operating or finance leases? Describe Does the company have leases where they are the lessor?

  Discuss the initiatives by the accounting profession

Discuss the initiatives by the accounting profession and in particular the Big 4 accounting firms to respond to the impact of Robotics and the Internet of Things

  What is the difference between actual and budgeted costs

If Francis had actual variable overhead costs of $58,500 for 9,000 vases produced, what is the difference between actual and budgeted costs for variable overhead?

  Determine the value of the business

What is the concept of time value money is important in ordinary business relationships? Explain. Determine the value of the business

  What is the present value of the savings

What is the present value of the savings if the interest rate is 5% per? year? You are thinking of building a new machine that will save you $1,000 in the first

  Find what will be the winning auction offer price

Assuming Roundtree would like to sell 2.18 million shares in its IPO, what will be the winning auction offer price?14.20 1,240,000.

  What was the balance of accounts receivable on january

What was the balance of accounts receivable on January 1, 2018, if $180 in accounts receivable were written off during 2018 and if the allowance account

  Show the book value during each year

Using the diminishing value method and the prime cost method, detail the cost each year to be allocated for reporting purposes and show the book value

  What is the probability that exactly four out of ten

What is the probability that exactly four out of ten 18-20 year olds have not consumed an alcoholic beverage

  What is the year one cash flow for raleigh bike company

As consultant to Raleigh Bike company, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?

  Cost method-cumulative-price-earnings ratio

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Appropriation of re..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd