2

You run a construction firm. You have just won a contract to construct a government building. It will take one year to construct it, requiring an investment of $9.78$ million today and $5$ million in one year. The government will pay you $22.5$ million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free rate is 11%.

  1. What is the NPV of this opportunity?
  2. How can your firm turn this NPV into cash today?

For #1 I solved the NPV by taking PV(Benefits) - PV(costs) = $\frac{22.5}{1.11}$ - $9.78 -$$\frac{$5}{1.11}$ = $6 million. Is this correct?

For #2, I am not sure what they mean. I am guessing it involves borrowing money today? Any help here? Thank you in advance for any help.

C. Matthews
  • 45
  • I don´t know what kind of calculator you possess but $\frac{22.5}{1.11} - 9.78 -\frac{5}{1.11}=5.9858\approx 6$ – callculus42 Jun 15 '17 at 16:00

2 Answers2

1

For 1, you have the correct calculation but the final answer is wrong. For 2, I think they want you to say you could borrow $9.78$ plus the NPV now and pay off the loan plus the $5$ at the end of the year out of the $22.5$ payment.

Ross Millikan
  • 374,822
0

Part II

I think Ross is almost right but here is one way you can present.

enter image description here

Satish Ramanathan
  • 11,984