Question

You run a construction firm. You have just won a contract to build a government office...

You run a construction firm.

You have just won a contract to build a government office complex.
Building it will require an investment of 9.5 million today and $5.3 million in one year. The government will pay you $20.8 million in one year upon the​ building's completion. Suppose the interest rate is 10.4% .

a. What is the NPV of this​ opportunity?

b. How can your firm turn this NPV into cash​ today?

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Homework Answers

Answer #1

1.
=-9.5-5.3/1.104+20.8/1.104
=4.54 million

2.
The firm can borrow 18.84 million today, and pay it back with 10.4% interest using the 20.8 million it will receive from the government (18.84 × 1.104 = 20.8). The firm can use 9.5 million of the 18.84 million to cover its costs today and save 4.80 million in the bank to earn 10.4% interest to cover its cost of 4.80 × 1.104 = 5.3 million next year.
This leaves 18.84 - 9.5 - 4.80 = 4.54 million in cash for the firm today.

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