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You can invest in a​ risk-free technology that requires an upfront payment of $1.16 million and will provide a perpetual annual cash flow of $118,000. Suppose all interest rates will be either 9.9% or 5.2% in one year and remain there forever. The​ risk-neutral probability that interest rates will drop to 5.2% is 85%. The​ one-year risk-free interest rate is 8.1 %8.1%​, 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 8.7%. a. What is the NPV of investing​ today?

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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