PMN601 – Assignment 31. A contractor is constructing a project for which he will be paid in one lump sum upon satisfactory completionof the project. The contractor needs cash to finance the construction and opens a line a credit at their bank (theloan would be repaid at the end of the project). The construction project is expected to last 16 months, and thecontractor expects to borrow $100,000 at the beginning of the first month, and at the end of each of the first sixmonths, making a total borrowing of $700,000. The contractor then needs to borrow $250,000 per month at theend of month 7 through 16, for an additional $2,500,000. The owner agrees to pay the contractor the lump sumpayment for the project at EOM 20, at which time the contractor will repay the bank. Interest on the contractorsoutstanding loan balance is 1.5% per month for the first 10 months and then 2% per month until EOM 20. Giventhis scenario, please answer the following questions.a. What is the minimum contract price for this project to be profitable?b. How would this number change if the interest rates were variable between 1-3% for the first 3 monthsand 1-5% for the remainder of the project?c. What is a reasonable rate of return for this project?d. How will your answers in a. and b. would change if the rate of return is what is described in c.?2. What is your preferred method for LCC? Please articulate your thoughts with examples in less than 1 page.
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