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QUESTION

You can invest in a risk-free technology that requires an upfront payment of \$ 1.07 million and will provide a perpetual annual cash flow of \$ 84...

You can invest in a risk-free technology that requires an upfront payment of \$ 1.07 million and will provide a perpetual annual cash flow of \$ 84 comma 000 . Suppose all interest rates will be either 9.7 % 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 8.4 % , and today's rate on a risk-free perpetual bond is 5.6 % . The rate on an equivalent perpetual bond that is repayable at any time (the callable annuity rate) is 8.8 % . 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.

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, so INVEST NOW or WAIT?

1. npv of investing today 430000 2. npv rate goes upNPV 0 npv rate goes down545385PV 452810 C. hurdle rate ruleNPVNPV&lt; 0so, Wait -115455