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 $10.2 million today and $5.2 million in one year. The government will pay you $20.5 million in one year upon the​ building's completion. Suppose the interest rate is 10.5%.

a. What is the NPV of this​ opportunity?

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

Answer 1

Part A:

NPV :
NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Year	CF	PVF @10.5 %	Disc CF
0	$ -10,200,000.00	1.0000	$ -10,200,000.00
1	$   15,300,000.00	0.9050	$   13,846,153.85
NPV	$     3,646,153.85

PVAF = SUm [ PVF(r%, n) ]
PVF(r%, n) = 1 / ( 1 + r)^n
r = Int rate per period
n = No. of periods

How to calculate PVAF using Excel:
=PV(Rate,NPER,-1)
Rate = Disc Rate
NPER = No.of periods

Part B:

Sell this opportunity of contract to outsiders for $ 3646154 and receive cash.