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

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

$ 10.4$10.4

million today and

$ 4.8$4.8

million in one year. The government will pay you

$ 21.8$21.8

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

10.6 %10.6%.

a. What is the NPV of this opportunity?

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

You run a construction firm. You have just won a contract to build a govemment office complex. Building it will require an investment of $10.4 million today and $4.8 million in one year. The government will pay you $21.8 milion in one year upon the buildings completion. Suppose the interest rate is 10.6%. 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 mllion. (Round to two decimal places.) b. How can your firm turn this NPV into cash today? (Select the best choice below.) A. O B. O C. D The firm can borrow $19.71 million today and pay it back with 10.6% interest using the $21.8 million it will receive from the government. The firm can borrow $15.2 million today and pay it back with 10.6% interest using the $21.8 million it will receive form the government. The firm can borrow S24.05 million today and pay it back with 10.6% interest using the $21.8 million it will receive from the government. The firm can borrow $15.2 million today and pay it back with 10.6% interest using the $19.71 million it will receive from the government.

Explanation / Answer

Answer =1 CALCULATION OF NPV OF THE OPPORTUNITY Year Cash Outflow / Inflow (in million) PVF @ 10.60% Present Value (Amt in million) 1 $                          -10.40 1.0000 $                  -10.40 2 $                             -4.80                   0.9042 $                    -4.34 2 $                            21.80                   0.9042 $                   19.71 Total $                      4.97 Answer= NPV of the opportunity = $                      4.97 Million Answer =2) Amount receivable from the government in today's amount = $ 19.71 Million So we can borrow this money from the government and repay with interest @ 10.60% to bank that will receive from the government is $ 21.80 Answer = Option A

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