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

question 43

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 $80,000,the NPV of investing in the project today using the hurdle rate is closest to:

• A)-$281,000
• B)+$46,000
• C)+$83,000
• D)+$143,000
• E)+$238,000

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Definitions:

Inferior Phrenic Vein

A vein draining the diaphragm, usually flowing into the inferior vena cava or the superior suprarenal vein.

Superior Mesenteric Vein

A large vein in the abdomen that drains blood from the small intestine, part of the large intestine, and other organs in the digestive system into the portal vein.

Gastrosplenic Vein

A blood vessel that drains blood from the stomach and spleen, typically emptying into the portal vein system.

Ulnar Veins

Veins located along the ulnar side of the arm that help return deoxygenated blood from the hand and forearm to the heart.