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

$ 9.7$9.7

million today and

$ 4.7$4.7

million in one year. The government will pay you

$ 21.5$21.5

million in one year upon the​ building's completion. Suppose the interest rate is

10.7 %10.7%.

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

​$nothing

million.  ​(Round to two decimal​ places.)

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

A.The firm can borrow

$ 14.4$14.4

million today and pay it back with

10.7 %10.7%

interest using the

$ 19.42$19.42

million it will receive from the government.

B.The firm can borrow

$ 14.4$14.4

million today and pay it back with

10.7 %10.7%

interest using the

$ 21.5$21.5

million it will receive from the government.

C.The firm can borrow

$ 23.67$23.67

million today and pay it back with

10.7 %10.7%

interest using the

$ 21.5$21.5

million it will receive from the government.

D.The firm can borrow

$ 19.42$19.42

million today and pay it back with

10.7 %10.7%

interest using the

$ 21.5$21.5

million it will receive from the government

Answer 1

a]

NPV = present value of cash inflow after 1 year - initial investment

initial investment = $9.7 million

cash inflow after 1 year = $21.5 million - $4.7 million = $16.8 million

present value = future value / (1 + interest rate)number of years

present value of cash inflow after 1 year = $16.8 million / (1 + 10.7%)1 = $15.177 million

NPV = $15.18 million - $9.7 million = $5.48 million

b]

The firm will receive $21.5 million from the government in 1 year.

Amount that can be borrowed today = amount received in 1 year / (1 + interest rate)number of years

Amount that can be borrowed today = $21.5 million / (1 + 10.5%)1

Amount that can be borrowed today = $19.42 million

The answer is D