Question

please answer questions 2-7.

2) You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10 million today and $5 million in one year. The government will pay you $20 million in one year upon the building's completion. Assume the investors' expected rate of return is 10%. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? wo soubongo 2 000,002220 wisi jo vs OoY ( LoY D wolno wyor 10 y 199 000, 22 silo y el bonsgye boligen o Solo i to bo d ysgol al olan W DODO blond

Answer 1

2]

NPV = sum of present values of cash flows

Cash flow in year 0 = -$10,000,000

Cash flow in year 1 = -$5,000,000 + $20,000,000 = $15,000,000

present value of each cash flow = cash flow / (1 + discount rate)ⁿ

where n = number of years after which the cash flow occurs

NPV = $3,636,364

1 Year Cash Flow PV of Cash Flow 0 $(10,000,000) $ (10,000,000) 1 $ 15,000,000 $ 13,636,364 NPV $ 3,636,364

А 1 Year Cash Flow 20 -10000000 =-5000000+20000000 NPV PV of Cash Flow =B2/(1+10%)^A2 =B3/(1+10%)^A3 =SUM(C2:03) 31

b]

The firm can turn this NPV into cash today by sub-contracting the contract to a third party. The sub-contractor will pay your firm upfront cash for the sub-contract, execute the contract, and collect the payments from the government.