You run a construction firm. You have just won a contract to construct a government building. It will take one year to construct it, requiring 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 rate is 11%.
- What is the NPV of this opportunity?
- How can your firm turn this NPV into cash today?
For #1 I solved the NPV by taking PV(Benefits) - PV(costs) = $\frac{22.5}{1.11}$ - $9.78 -$$\frac{$5}{1.11}$ = $6 million. Is this correct?
For #2, I am not sure what they mean. I am guessing it involves borrowing money today? Any help here? Thank you in advance for any help.
For 1, you have the correct calculation but the final answer is wrong. For 2, I think they want you to say you could borrow $9.78$ plus the NPV now and pay off the loan plus the $5$ at the end of the year out of the $22.5$ payment.