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

question 42

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,Rearden should:

• A)invest today since the NPV is positive.
• B)invest today since the NPV is negative.
• C)invest today since the NPV using the hurdle rate is positive.
• D)delay investing since the NPV using the hurdle rate is negative.
• E)delay investing since the NPV using the hurdle rate is positive.

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Definitions:

Individual Self

The concept of oneself as a separate entity having unique thoughts, experiences, and abilities, distinct from others.

Empirical Evidence

Information that is acquired by observation or experimentation and serves as a foundation for knowledge in the scientific method.

Objectively Self-aware

A state in which an individual becomes the object of their own attention, leading to an evaluation of self against certain standards.

Deindividuated

A condition wherein an individual's sense of personal identity and responsibility is diminished due to being in a group, leading to behavior that is uncharacteristic of the individual when alone.