Question

Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $ 4.94 million. The product is expected to generate profits of $ 1.14 million per year for ten years. The company will have to provide product support expected to cost $ 94 comma 000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 6.1 %​? Should the firm undertake the​ project? Repeat the analysis for discount rates of 1.2 % and 16.4 %​, respectively. b. What is the IRR of this investment​ opportunity?   c. What does the IRR rule indicate about this​ investment? a. What is the NPV of this investment if the cost of capital is 6.1 %​? Should the firm undertake the​ project? Repeat the analysis for discount rates of 1.2 % and 16.4 %​, respectively. If the cost of capital is 6.1 %​, the NPV will be ​$ nothing. ​(Round to the nearest​ dollar.) Should the firm undertake the​ project?  ​(Select the best choice​ below.) A. No comma because the NPV is less than zero. B. ​No, because the NPV is not greater than the initial costs. C. Yes comma because the NPV is equal to or greater than zero. D. There is not enough information to answer this question. When r equals 1.2 %​, the NPV will be ​$ nothing. ​(Round to the nearest​ dollar.) When r equals 16.4 %​, the NPV will be ​$ nothing. ​ (Round to the nearest​ dollar.)

Answer 1

Year	Cash flows	PVIF @ 6.1%	Present Value
0	(6,480,984)	1	(6,480,983.61)	=-4940000-94000/6.1%
1	1014000	0.9425	955702.1678
2	1014000	0.8883	900756.0488
3	1014000	0.8372	848968.9433
4	1014000	0.7891	800159.2302
5	1014000	0.7437	754155.7306
6	1014000	0.7010	710797.1071
7	1014000	0.6607	669931.2979
8	1014000	0.6227	631414.9839
9	1014000	0.5869	595113.0857
10	1014000	0.5532	560898.29
IRR	9.09%
NPV			946,913.28
Yes, Undertake the project

If the Discount rate is 1.2%

Year	Cash flows	PVIF @ 1.2%	Present Value
0	(12,773,333)	1	(12,773,333.33)	=-4940000-94000/1.2%
1	1014000	0.9881	1001976.285
2	1014000	0.9764	990095.1429
3	1014000	0.9648	978354.8843
4	1014000	0.9534	966753.8382
5	1014000	0.9421	955290.354
6	1014000	0.9309	943962.8003
7	1014000	0.9199	932769.5656
8	1014000	0.9090	921709.0569
9	1014000	0.8982	910779.7005
10	1014000	0.8876	899979.9412
IRR	-3.99%
NPV			(3,271,661.77)
No, Reject the project

If the Discount rate if 16.40%

Year	Cash flows	PVIF @ 16.4%	Present Value
0	(5,513,171)	1	(5,513,170.73)	=-4940000-94000/16.4%
1	1014000	0.8591	871134.0206
2	1014000	0.7381	748396.9249
3	1014000	0.6341	642952.6846
4	1014000	0.5447	552364.8494
5	1014000	0.4680	474540.2486
6	1014000	0.4021	407680.6259
7	1014000	0.3454	350241.0876
8	1014000	0.2967	300894.4051
9	1014000	0.2549	258500.348
10	1014000	0.2190	222079.3368
IRR	12.95%
NPV			(684,386.20)
No, Reject the project

As per IRR and NPV undertake the project only at 6.1%