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

question 42

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,Rearden should:

• A)invest today since the NPV is positive.
• B)invest today since the NPV is negative.
• C)invest today since the NPV using the hurdle rate is positive.
• D)delay investing since the NPV using the hurdle rate is negative.
• E)delay investing since the NPV using the hurdle rate is positive.

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Definitions:

Correlation

A statistical measure showing how two securities move in relation to each other.

Composite Risk Rating

An assessment tool that combines multiple risk factors into a single overarching rating to simplify decision-making.

PRS

Political Risk Services; a measure assessing the risk of investing in a country, including factors like government stability and conflict likelihood. If the term was intended to signify something else without context, then NO.

CAPM

The Capital Asset Pricing Model, a finance theory that describes the relationship between systematic risk and expected return for assets, particularly stocks.