Question

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. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate is 10%. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today?

Answer 1

Answer:

$3.64 million

The Npv can be turned into cash by borrowing $18.18 million today and paying back in one year time with the $20 million that would be paid

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator

Cash flow in year 0 = $-10 million

Cash flow in year 1 = $20 million - $5 million = 15 million

I = 10%

NPV = 3.63 million

The Npv can be turned into cash by borrowing $18.18 million today as the present value of 20 million is 18.18 million

20 million / 1.10 = 18.18 million

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute