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 $ 10.5 million today and $ 5.3 million in one year. The government will pay you $ 20.8 million in one year upon the​ building's completion. Suppose the interest rate is 10.4 %.

a. What is the NPV of this​ opportunity?

The NPV of the proposal is ​?million(Round to two decimal​ places.)

How can your firm turn this NPV into cash​ today?  ​(Select the best choice​ below.)

A. The firm can borrow$ 15.8 million today and pay it back with 10.4 % interest using the $ 18.84 million it will receive from the government.

B.The firm can borrow$ 15.8 million today and pay it back with 10.4 %interest using the $ 20.8 million it will receive from the government.

C.The firm can borrow $ 18.84 million today and pay it back with 10.4 % interest using the $ 20.8 million it will receive from the government.

D.The firm can borrow $ 23.64 million today and pay it back with 10.4 % interest using the $ 20.8 million it will receive from the government.

Answer 1

NPV = Present value of cash inflows - Present value of cash outflows

= -10.5 million + (20.8 million - 5.3 million)/(1.104)

= $3.5399 million

i.e. 3.54 million

C.The firm can borrow $ 18.84 million today and pay it back with 10.4 % interest using the $ 20.8 million it will receive from the government.

Amount to be borrowed = 20.8 million/1.104

= $18.84 million