You can invest in a risk-free technology that requires an upfront payment of $1million and will provide a perpetual annual cash flow of $ 76,000 . Suppose all interest rates will be either 10.2 % or 4.5% in one year and remain there forever. The risk-neutral probability that interest rates will drop to 4.5% is 91% . The one-year risk-free interest rate is 8.4 % , and today's rate on a risk-free perpetual bond is 5.4%. The rate on an equivalent perpetual bond that is repayable at any time (the callable annuity rate) is 8.8% .

a. What is the NPV of investing today?

The NPV is $___ (round to the nearest dollar)

b. What is the NPV of waiting and investing tomorrow?

The NPV if the rate goes up is $_____(Round to the nearest dollar.)

The NPV if the rate goes down is $_____ (Round to the nearest dollar.)

The PV is $____ (Round to the nearest dollar.)

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 nearest dollar.)

The NPV less than 0, so invest or wait.