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 $10 million today and $5.00 million in one year. The government will pay you $22 million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate is 8%.

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

Year Details PV F @ 8% PV 0 Initial investment -10000000 1 -10000000 1 Inv -5000000 0.92593 -4629650 1 Govt. pay 22000000 0.92593 20370460 NPV of the opportunity 5740810 a)NPV of this opportunity is $ 5.74 million The firm can borrow $ 20370460   today and pay it back with 8% interest using the pay it will recieve from the government. The firm can use 10000000 of the _20370460 to cover its costs today and save _10370460 in the bank to earn 8% interest to cover its costs of _4629650 next year. This leaves _$5740810 in cash for the firm today.

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