a. Calculation of the NPV of this opportunity
Net present value (NPV) = - Cash outflow at time 0 - cash outflow at time 1 / (1+r) ^1 + cash inflow at time 1 / (1+r) ^1
Where,
Required rate of return or interest rate r =10.1%
And time period t = 0 and 1
Cash outflow at year 0 = $10.4 million
Cash outflow at year 1 = $4.5 million
Cash inflow for year 1 =$20.3 million
NPV = - $10.4 million - $4.5 million/ (1+10.1%) ^1 +$20.3 million / (1+10.1%) ^1
= - $10.4 million - $4.087 million + $18.44 million = $3.95 million
Net present value (NPV) of this opportunity is $3.95 million
The firm can borrow $18.44 million today and pay it back with 10.1% interest using the $20.3 million it will receive from the government
Therefore correct answer is option B. The firm can borrow $18.44 million today and pay it back with 10.1% interest using the $20.3 million it will receive from the government
The present value of cash inflow of $20.3 million at year 1 is $18.44 million; therefore the firm can borrow $18.44 million today and pay it back with 10.1% interest
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