Bridge building project in edmonton

Assignment Help Financial Management

Reference no: EM131861506

Roadworthy Inc. is a bridge construction company. It has been contracted on a $75 million bridge building project in Edmonton. The contract terms specified that the company must complete the project within three years, and the company will be paid at the end of each year according to the percentage completion on the bridge. For example, at the end of the first year of construction, the company will be paid 25% x $75 million = $18.75 million, as per the company’s submitted bid, which indicated the following completion schedule:

Year 1: 25% completion

Year 2: 75% completion

Year 3: 100% completion

The contract terms also specified that should the project fall behind schedule, Roadworthy will be assessed a penalty of $15 million for each year of delay. The discount rate on this project is 15%

a. Assuming the company completes the project on schedule, what is the present value of this project to the company?

b. If the company completes the project on time, what is the future value to the company at the end of the project (i.e., at the end of Year 3)?

c. During the second year of construction, part of the bridge collapsed due to incorrect construction. Fortunately, the collapse occurred at night, and there were no injuries or casualties. However, new parts and equipment needed to be purchased, and the project had to restart from scratch. The adjusted schedule of completion of the entire project became

Year 3: 25%

Year 4: 75%

Year 5: 100%

Roadworthy would not be receiving any payment in Years 2 and 3, as payment has already been received for 25% completion of the project. If the company’s bridge construction went according to the new schedule, it would receive the next payment at the end of Year 4, and the last payment at the end of Year 5.

Furthermore, due to the delay in the project, the City of Edmonton will assess the company $15 million for each year of delay, with the penalties due at the end of Years 4 and 5.

What is the future value of this project at the end of Year 5?

d. What is the minimum penalty that the city of Edmonton should charge Roadworthy in order to force it to complete the project by Year 4, with the following completion schedule?

Year 3: 50%

Year 4: 100%

(Hint: At the minimum penalty level, the future value of the project to the company will be $0 at end of Year 4.)

Reference no: EM131861506

Questions Cloud

Conduct a consumer analysis for the product : To conduct a consumer analysis for the product-the good, service, or idea-in your marketing plan: 1 Identify the consumers who are most likely to buy.

Create information and ideas in virtual communities : A premise of this model is that consumers carefully evaluate the merits and weaknesses of a given product when they consider .

How many futures contracts does this firm need to sell : Each futures contract is for 1,000 barrels. How many futures contracts does this firm need to sell or buy today to hedge the risk you defined above?

What is a buying center : What is a buying center? Describe the roles assumed by people in a buying center and what useful questions should be raised to guide any analysis.

Bridge building project in edmonton : Roadworthy Inc. is a bridge construction company. It has been contracted on a $75 million bridge building project in Edmonton.

How to improve the marketing effort behind new system : A firm that is marketing multimillion-dollar wastewater treatment systems to cities has been unable to sell a new type of system.

Are patents helpful in the process of developing : Mayo Clinic has filed an application for a broad method patent that gives it control over a new generation of treatments for chronic sinus inflammation.

Impact purchasing and paying habits of customers : The terms of sales and potential discounts or penalties can impact purchasing and paying habits of customers. How might this be so?

Write matlab program that prompts user for load impedance : Write a Matlab program that prompts the user for the following: Generator parameters, line characteristic impedance, line length, and load impedance

User Account

All Pages