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

question 53

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 $55,000,the NPV of investing in the project next year is closest to:

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

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Definitions:

Consensus

A general agreement or the process of reaching such an agreement within a group, emphasizing collaborative decision-making.

Innovation

Generation of new and usable ideas; an important element of leadership performance. See creativity.

Usable Ideas

Pertains to concepts or proposals that can be effectively implemented or applied in practical scenarios.

Growth Through Coordination

Enhancing organizational performance and capabilities by effectively managing and harmonizing interrelated tasks and functions.