You run a construction firm. You have just won a contract to build a government office building. Building it requires an investment of $10.4 million today, and $5.0 million in one year. The government will pay you $24.0 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 9%. The NPV of this opportunity is $Answer million.

Question

Business

Jeffery Howard

12 May, 10:35

You run a construction firm. You have just won a contract to build a government office building. Building it requires an investment of $10.4 million today, and $5.0 million in one year. The government will pay you $24.0 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 9%. The NPV of this opportunity is $Answer million.

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Lincoln Norton · Answer 1

The NPV of the opportunity is $7.02 million.

Explanation:

In order to find the NPV of this opportunity we will have to discount all the cash flows both positive and negative and find their present value.

The first cash flow is of $10.4 million and is a negative cash flow and we dont need to discount it as it is being paid today.

The second cash flows is one year from now and is a negative cash flow of $5 million. We will discount is using the interest rate which is 9%.

5/1.09=4.58 million.

The third cash flow is also one year from now and is a positive cash flow and we will discount is using the interest rate of 9%.

24/1.09=22 million

In order to find the NPV we will add all these discounted cash flows.

22 million - 10.4 million - 4.58 million = 7.02 million