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:

Positive Reinforcement

A method in behavior modification that involves rewarding a desired behavior, thereby increasing the likelihood that the behavior will happen again.

Negative Reinforcement

A behavioral principle where the removal of an unpleasant stimulus following a behavior increases the likelihood of that behavior being repeated.

Positive Reinforcement

An increase in the future frequency of a behavior due to the addition of a stimulus immediately following a response.

Negative Reinforcement

A behavioral principle where the removal of an unpleasant stimulus strengthens a behavior, increasing its occurrence.