You can invest in a risk-free technology that requires an upfront payment of $1.18 million and will provide a perpetual annual cash flow of $77,000. Suppose all interest rates will be either 9.9 % or 4.7% in one year and remain there forever. The risk-neutral probability that interest rates will drop to 4.7% is 95%. The one-year risk-free interest rate is 8.4%, and today's rate on a risk-free perpetual bond is 5.3%. The rate on an equivalent perpetual bond that is repayable at any time (the callable annuity rate) is 9.4%.

a. What is the NPV of investingtoday?

b. What is the NPV of waiting and investingtomorrow?

c. Verify that the hurdle rate rule of thumb gives the correct time to invest in this case.

a. What is the NPV of investingtoday?

The NPV is $__________. (Round to the nearestdollar.)

b. What is the NPV of waiting and investingtomorrow?

The NPV if the rate goes up is $____________. (Round to the nearestdollar.)

The NPV if the rate goes down is $_________. (Round to the nearestdollar.)

The PV is $__________. (Round to the nearestdollar.)

c. Verify that the hurdle rate rule of thumb gives the correct time to invest in this case.

The hurdle rule is $___________. (Round to the nearestdollar.)

The NPV < 0,so (1) invest now or (2) wait. (Selectone of them)