Your firm has been hired to develop new software for the university's class registration system. Under the contract, you will receive $506,000
as an upfront payment. You expect the development costs to be $446,000 per year for the next 3 years. Once the new system is in place, you will receive a final payment of $872,000 from the university 4 years from now.
a. What are the IRRs of this opportunity? (Hint: Build an Excel model which tests the NPV at 1% intervals from 1% to 40%. Then zero in on the rates at which the NPV changes signs.)
b. If your cost of capital is 10%, is the opportunity attractive?
Suppose you are able to renegotiate the terms of the contract so that your final payment in year 4 will be $1.2 million.
c. What is the IRR of the opportunity now?
d. Is it attractive at the new terms?
a) 7.25% and 29.32% b) At 10% NPV is -7548.25, which gives a negative return. Hence the project is not attractive.... View the full answer