Concept explainers
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 mi lion 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 is 10%.
- a. What is the
NPV of this opportunity? - b. How can your firm turn this NPV into cash today?
Want to see the full answer?
Check out a sample textbook solutionChapter 3 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Additional Business Textbook Solutions
Foundations Of Finance
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Foundations of Finance (9th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Cost Accounting (15th Edition)
Financial Accounting (12th Edition) (What's New in Accounting)
- You run a construction firm. You have just won a contract to build a government office building. Building it will take one year and require an investment of $9.78 million today and $5 million in one year. The government will pay you $22.5 million 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?arrow_forwardYou run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $10.4 million today and $4.8 million in one year. The government will pay you $21.8 million in one year upon the building's completion. Suppose the interest rate is 10.2% a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? a. What is the NPV of this opportunity? The NPV of the proposal is $ million. (Round to two decimal places.)arrow_forwardYou run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $10.2 million today and $4.7 million in one year. The government will pay you $20.7 million in one year upon the building's completion. Suppose the interest rate is 10.6%. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? a. What is the NPV of this opportunity? The NPV of the proposal is $million (Round to two decimal places.) CZTEarrow_forward
- 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 completion. Suppose the cash flows and their time are certain, and the interest rate is 10%. What is the NPV of this opportunity?arrow_forwardYou run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $9.5 million today and $5.5 million in one year. The government will pay you $21.7 million in one year upon the building's completion. Suppose the interest rate is 10.3%. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? www. a. What is the NPV of this opportunity? The NPV of the proposal is $ million. (Round to two decimal places.) b. How can your firm turn this NPV into cash today? (Select the best choice below.) O A. The firm can borrow $19.67 million today and pay it back with 10.3% interest using the $21.7 million it will receive from the government. B. The firm can borrow $15.0 million today and pay it back with 10.3% interest using the $21.7 million it will receive from the government. O C. The firm can borrow $15.0 million today and pay it back with 10.3% interest using the $19.67 million it will…arrow_forwardYou run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $10.1010.10 million today and $5.105.10 million in one year. The government will pay you $21.2021.20 million in one year upon the building's completion. Suppose the interest rate is 10.2 % 10.2 %. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today?arrow_forward
- Your firm has a risk-free investment opportunity where it can invest $160,000 today and receive $170,000 in one year. For what level of interest rate is this project attractive? The project will be attractive when the interest rate is any positive value less than or equal to ____________%? (Round to two decimal places.)arrow_forwardYour firm has a risk-free investment opportunity with an initial investment of $162,000 today and receive $175,000 in one year. For what level of interest rates is this project attractive? The project will be attractive when the interest rate is any positive value less than or equal to _______% ?arrow_forwardYou are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today. Suppose the risk-free interest rate is 6% per year. Should you take this project? The NPV for this project is closest to: A) Yes; NPV = $165 B) No; NPV = $165 C) Yes; NPV = -$165 D) No; NPV = -$165arrow_forward
- Your firm has identified three potential investment projects. The projects and their cash flows are shown here: Cash Flow Today (millions) -$10 $5 $20 Cash Flow in One Year Project (millions) $20 $5 -$10 Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose only one of these projects, which should it choose based on the NPV decision rule? c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule? ABCarrow_forwardConsider an entrepreneur who plans to invest in a project that requires an initial investment of $1,800 this year. The project will generate either $1,600 or $4,200 next year. The cash flows of the project depend on whether the economy is weak or strong. Both scenarios are equally likely. The risk-free rate is 4% and the risk premium of the project is 12%. Assume perfect capital markets. Now assume that the entrepreneur will borrow $400 at 5% interest rate to finance the project. The cost of equity of the project is closest to: 16.60% 17.72% 18.29% 19.43% None of the abovearrow_forwardYou are considering an investment in a clothes distributer. The company needs $105,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 17%. What does the IRR rule say about whether you should invest? What is the IRR of this investment oppurtunity? The IRR of this investment opppurtunity is ____%arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education