Question

Your firm has been hired to develop new software for the​ university's class registration system. Under the​ contract, you will receive $ 510,000 as an upfront payment. You expect the development costs to be $ 444,000 per year for the next 3 years. Once the new system is in​ place, you will receive a final payment of $ 862,000 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?

Answer 1

a]

The NPV changes signs at 8% and 28%. These are the IRRs

b]

At 10% discount rate, the NPV is negative $5,405. The opportunity is not attractive

c]

The IRR cannot be determined using change of sign method since the NPV stays positive at all discount rates

d]

Yes, the NPV is positive. The opportunity is attractive