Page 1 - Test
P. 1
1.
According to the question, the cashflow can be expressed as
the following graph.
$20M
-$10M -$5M
st
th
0 year 1 year
Risk-free interest rate = 10%
(a) NPV = -10M + (20M – 5M)/(1+10%)
NPV = $3.64 Million
(b) Borrow cash of amount $13.64 Million from bank with
interest rate equal to 10%.
Today 1 year
st
Borrow from a Bank -$15M
with 10% interest rate $13.64M
Building Investment -$10M -$5M
Return from Government 0 $20M
Net Cashflow $3.64M 0
