Use the Following Information to Answer the Question(s)below

question 37

Multiple Choice

Use the following information to answer the question(s) below.
Rearden Metal can invest in a risk-free technology that requires an up-front investment of $1 million.Rearden's managers are hesitant to invest because of uncertainty over future interest rates.Suppose that all interest rates will be either 8% or 4% in one year and remain there forever.The risk-neutral probability that interest rates will drop to 4% is 40%.The one-year risk-free interest rate is 5% and today's rate on a risk-free perpetual bond is 6%.The rate on an equivalent perpetual bond that is repayable at any time (the callable annuity rate) is 7.65%.
-Assuming that this project will provide Rearden with perpetual annual cash flows of $55,000,the NPV of investing in the project today using the hurdle rate is closest to:

• A)-$281,000.
• B)-$150,000.
• C)-$83,000.
• D)+$83,000.
• E)+$281,000.

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Definitions:

Finished Goods Inventory

Represents the stock of completed products that are ready to be sold but have not yet been sold to customers.

Contribution Margin Ratio

The percentage of each sales dollar remaining after variable costs have been subtracted, indicating how much contributes to covering fixed costs and generating profit.

Fixed Costs

Costs that do not vary with the level of production or sales, including rent, salaries, and insurance premiums.

Break-even

The point at which total costs and total revenues are equal, resulting in no net loss or gain for a business.