You run a construction firm. You just won a contract to build a governent office

Question

You run a construction firm. You just won a contract to build a governent office building. Building it will require one year and require an investment of $9.79 million today and $5.00 million in one year. The government will pay you $23.50 million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate is 9%.

a) What is the NVP of this opportunity?

The NPV of this opportunity is $_____ million. (round to two decimal places)

b) The firm can borrow _____ today and pay it back with 8% interest using the _____ it will recieve from the government. The firm can use _____ of the _____ to cover its costs today and save _____ in the bank to earn 8% interest to cover its costs of _____ next year. This leaves _____ in cash for the firm today.

Explanation / Answer

Calculation of NPV Total Investment to construction firm Milion $ First Investment 9.79 Investment after one year (5*0.917 PVF at 9% Interset Rate) 4.585 Total Investment to Construction firm 14.375 The Government Payment after completion of Construction (23.5*0.917 PVF at 9% Interset Rate) 21.5495 NPV of construction firm 7.1745 b) The firm can borrow _14.415 Milion_ today and pay it back with 8% interest using the _21.5495_Milion_ it will recieve from the government. The firm can use _9.79 Milion_ of the _Bank Loan_ to cover its costs today and save __4.63 Milion_ in the bank to earn 8% interest to cover its costs of _5 Milion_ next year. This leaves _19.00 Milion_ in cash for the firm today.

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