View the step-by-step solution to:

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...

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?

Top Answer

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

a and b Calculation.PNG

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online