Question

You run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $ 9.7 million today and $ 5.5 million in one year. The government will pay you $ 21.5 million in one year upon the? building's completion. Suppose the interest rate is 10.7 %.

a. What is the NPV of this? opportunity? $ million (Round two decimal places)

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

A.The firm can borrow $ 19.42 million today and pay it back with 10.7 % interest using the $ 21.5 million it will receive from the government.

B.The firm can borrow $ 24.39 million today and pay it back with10.7 %interest using the $ 21.5 million it will receive from the government.

C.The firm can borrow $ 15.2 million today and pay it back with 10.7 % interest using the $19.42 million it will receive from the government.

D.The firm can borrow $ 15.2 million today and pay it back with 10.7% interest using the $21.5million it will receive from the government.

Answer 1

	Year	0	1
	Investment	-9.7	-5.5
	Payment from govt.		21.5
	Cash flow	-9.70	16.00
a)	NPV @ 10.7%	4.75
b)	Borrow	19.42	today
	Invest	9.7	today
	Cash left	9.72	today
	Deposit in bank	4.97	today
	Net cash left	4.75	today
	A.The firm can borrow $ 19.42 million today and pay it back with 10.7 % interest using the $ 21.5 million it will receive from the government.