Question

Your firm has been hired to develop new software for the​ university's class registration system. Under the​ contract, you will receive $492,000 as an upfront payment. You expect the development costs to be $439,000 per year for the next 33years. Once the new system is in​ place, you will receive a final payment of $865,000 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 4will be $1.2million.  

c. What is the IRR of the opportunity​ now?

d. Is it attractive at the new​ terms?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -