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 $10.1 million today and $4.9 million in one year. The government will pay you $20.6 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? a. What is the NPV of this opportunity? The NPV of the proposal is $ million. (Round to two decimal places.) b. How can your firm turn this NPV into cash today? (Select the best choice below.) O A. The firm can borrow $18.64 million today and pay it back with 10.5% interest using the $20.6 million it will receive from the government. O B. The firm can borrow $15.0 million today and pay it back with 10.5% interest using the $20.6 million it will receive from the government. O C. The firm can borrow $23.07 million today and pay it back with 10.5% interest using the $20.6 million it will receive from the government. OD. The firm can borrow $15.0 million today and pay it back with 10.5% interest using the $18.64 million it will receive from the government.

Answer 1

a. 4.11 Mn $

Particulars	$ In Mn	DF @ 10.50%	PVCF @ 10.50%
Initial Investment	10.1	1.000	10.10
Investment in Y1	4.9	0.905	4.43
Total Prsent Value Cash Out Flow (A)			14.53
Cash Inflow at Y1	20.6	0.905	18.64
Total Prsent Value Cash IN Flow (B)			18.64
Net Present Value (B-A)			4.11

b.Option A, Borrow 18.64mn$ which is equals to Present Value of cash inflow. Since it will become 20.60 Mn$ at year end and the same can be paid with proceeds of 20.60 mn$ received from govt.