Here is the question that I am being asked..verbatum:
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 (building is completed in one year). Suppose the cash flows and their times of paymant are certain; and the risk free interest rate is 10%. 1)Determine the PW of the investment.2) How could the firm turn this PW into cash today?
I figure that I have to use Net Present Value, but I dont understand how to use it. Here is my table:
A B
Year Cash Flow
0 ($10,000,000)
1 ($5,000,000) + $20,000,000
NPV = (10%,B2:B3) = $3,305,785.12
To answer the second question, I figure the firm could invest their money (approx. $13.3M) into anther high-interest bearing account (say 10%) before the start of the project that will pay out the interest at the time they need to upfront the first payment. This way the company will always have a small surplus of cash at the time of the payouts.
Year Interest Earned Total Cash amount Payment Total after payment
-1 - - - $13,300,000.00
0 $1,330,000.00 $14,630,000.00 ($10,000,000.00) $4,630,000.00
1 $463,000.00 $5,093,000.00 ($5,000,000.00) $93,000.00
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 (building is completed in one year). Suppose the cash flows and their times of paymant are certain; and the risk free interest rate is 10%. 1)Determine the PW of the investment.2) How could the firm turn this PW into cash today?
I figure that I have to use Net Present Value, but I dont understand how to use it. Here is my table:
A B
Year Cash Flow
0 ($10,000,000)
1 ($5,000,000) + $20,000,000
NPV = (10%,B2:B3) = $3,305,785.12
To answer the second question, I figure the firm could invest their money (approx. $13.3M) into anther high-interest bearing account (say 10%) before the start of the project that will pay out the interest at the time they need to upfront the first payment. This way the company will always have a small surplus of cash at the time of the payouts.
Year Interest Earned Total Cash amount Payment Total after payment
-1 - - - $13,300,000.00
0 $1,330,000.00 $14,630,000.00 ($10,000,000.00) $4,630,000.00
1 $463,000.00 $5,093,000.00 ($5,000,000.00) $93,000.00