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

$ 9.9

million today and

$ 4.5

million in one year. The government will pay you

$ 21.9

million in one year upon the​ building's completion. Suppose the interest rate is

10.7 %

a. What is the NPV of this​ opportunity?

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

a. What is the NPV of this​ opportunity?

The NPV of the proposal is

​

million.

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Homework Answers

Answer #1

Answer :

a) NPV is the difference between present value of cash inflow and present value of cash outflow.

NPV = PV of cash inflows - PV of cash outflows

PV of cash outflows = 9,900,000 + 4,500,000 / ( 1 + 0.107 )

= 9,900,000 + 4,065,040.65

= 13,965,040.65

PV of cash inflows = 21,900,000 / ( 1 + 0.107 )

= 19,783,197.83

NPV = 19,783,197.83 - 13,965,040.65

= 5,818,157.18

b) The firm can borrow $19,783,197.83 today, and pay it back with 10.7% interest using the $21.9 million it will receive from the government.

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