3. You run a construction firm. You have just won a contract to construct a government office building. It will take one year to construct it, requiring an investment of $10 million today and $5 million in one year. The government will pay you $20 million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate (i. e., the discount rate) is 10%. What is the NPV of this opportunity?

Question

Business

Ali Wise

13 October, 16:39

3. You run a construction firm. You have just won a contract to construct a government office building. It will take one year to construct it, requiring an investment of $10 million today and $5 million in one year. The government will pay you $20 million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate (i. e., the discount rate) is 10%. What is the NPV of this opportunity?

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Shaun · Answer 1

NPV = $1,983,471.1

Explanation:

Giving the following information:

To calculate the present value you need to use the Net Present Value. The NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

The formula is:

NPV = - Io + ∑[Rt / (1+i) ^t]

where:

R t = Net cash inflow-outflows during a single period t

i=Discount rate of return that could be earned in alternative investments

t=Number of timer periods

NPV = - 10,000,000 - 5,000,000/1.10 + (20,000,000/1.10^2)

NPV = $1,983,471.1