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

question 10

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 next year is closest to:

• A)-$281,000.
• B)+$46,000.
• C)+$83,000.
• D)+$143,000.
• E)+$238,000.

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Definitions:

Periosteum

Bones are encompassed by a rich, vascular connective tissue layer, dense except at the points where joints are formed.

Longitudinal Growth

The increase in length of bones due to the activity in the epiphyseal plates, which contributes to overall height during development.

Epiphyseal Plate

The growth plate located at the end of long bones, responsible for longitudinal growth.

Chondroblasts

Cells that actively produce the components of the extracellular matrix, leading to the formation of cartilage tissue.