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

question 27

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 $65,000,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:

Death Ignorers

Individuals who do not fear death because they believe that their physical death will not lead to the end of their existence.

Lethal Means

methods or objects that can be used to inflict self-harm or suicide with high lethality.

Drug Overdose

The ingestion or application of a drug in quantities greater than recommended, leading to a toxic state or death.

Surprising Example

An unexpected case or illustration that deviates from what is considered common or typical.