You can invest in arisk-free technology that requires an upfront payment of $1million and will provide a perpetual annual cash flow of $80,000. Suppose all interest rates will be either 10.0%or 5.0 %in one year and remain there forever. Therisk-neutral probability that interest rates will drop to 5.0%is 90%. Theone-year risk-free interest rate is 8.0%,andtoday's rate on arisk-free perpetual bond is 5.4%. The rate on an equivalent perpetual bond that is repayable at any time(the callable annuityrate) is 9.0%.

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.