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:

Fertilizer Runoff

The movement of water-soluble components of fertilizer from agricultural lands to nearby water bodies, potentially causing nutrient pollution and algal blooms.

Smokestack

A large, tall chimney through which combustion gases and smoke are discharged, commonly seen in industrial plants and ships.

Persistence

The ability of a substance to remain in the environment for a long time without breaking down.

Chemical Nature

The inherent characteristics, composition, and properties of a substance or material at the atomic or molecular level.