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In: Finance

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 $ 10.0 million today and $ 5.0 million in one year. The government will pay you $ 20.0 million in one year upon the? building's completion. Suppose the interest rate is 10.0 %.

a. What is the NPV of this? opportunity?

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

Solutions

Expert Solution

Statement showing Cash flows
Particulars Time PVf 10% Amount PV
Cash Outflows                              -                      1.0000       (10,000,000.00)          (10,000,000.00)
Cash Outflows                         1.00                    0.9091         (5,000,000.00)            (4,545,454.55)
PV of Cash outflows = PVCO          (14,545,454.55)
Cash inflows                         1.00                    0.9091         20,000,000.00            18,181,818.18
PV of Cash Inflows =PVCI            18,181,818.18
NPV= PVCI - PVCO               3,636,363.64
One year from now, your investments would cost $16 (10m*1.1 + 5m). The government will pay 20m at the same time. This means that 1 year from now, you will have a 4 mil profit. If you borrow the $3,636,363.63 (4m/1.1) now and get cash, your borrowing will cost you 10% interest which is ~$4mil

jeff jeffy answered 2 years ago
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