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 $ 10.3 million today and $ 5.2 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 10.8 %

.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. (Round to two decimal places.)

Solutions

Expert Solution

Requirement (a)-Net Present Value (NPV) of the Opportunity

Net Present Value (NPV) = Present Value of the cash inflows – Present Value cash outflows

Present Value of cash inflows

Present Value of cash inflows = $219,00,000 / (1 + 0.1080)¹

= $219,00,000 / 1.1010

= $1,97,65,342.96

Present Value of cash outflows

Present Value of cash outflows = [$103,00,000 / 1.0000] + [$52,00,000 / (1 + 0.1080)¹]

= [$103,00,000 / 1.0000] + [$52,00,000 / 1.1080]

= $103,00,000 + $46,93,140.79

= $1,49,93,140.79

Therefore, the Net Present Value (NPV) = Present Value of the cash inflows – Present Value cash outflows

= $1,97,65,342.96 - $1,49,93,140.79

= $47,72,202.17

Requirement (b)

-Firstly, the firm would borrow $19.77 million today and pay the borrowed amount with 10.80% by using the $21.90 million it will receive from the government (19.77 x 1.1080 = 21.90).

-Then the firm can utilize $10.30 million from the borrowed amount of $19.77 million to cover the costs today and save $4.69 million in the bank to earn 10.80% interest to cover its cost of $5.20 Million (4.69 × 1.10.80) in next year.

jeff jeffy answered 1 year ago

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