NPV Conversion into Cash Today
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You run a construction firm. You have a contract to build a government office building. Building it will take one year and require 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 flow and their times of payment are certain and the risk-free interest rate is 10% .
a, What is the NPV of this opportunity?
b. How can your firm turn this NPV into cash today?
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Solution Summary
This solution shows how to calculate the net present value (NPV) of a given opportunity, and an explanation of how to turn this NPV into cash immediately.
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a. NPV= PV of inflows - PV of costs
There is an inflow of $20 million at the end of 1 year and the rate is 10%
PV of inflow = 20/1.1 = 18.18 million
The outflows are $10 million now and $5 million in 1 year
PV of outflows = 10 + 5/1.1 ...
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