Question

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 $443,000 per year for the next 3 years. Once the new system is in place, you will receive a final payment of $863,000 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.) (The IRRs of the project in ascending order are blank% and blank%)

b. If your cost of capital is 10%, is the opportunity attractive?

c. What is the IRR of the opportunity now?

d. Is it attractive at the new terms?

please provide excel format to run other problems like the please.

Answer 1

		Year	Cash Flow
		0	506000
		1	-443000
		2	-443000
		3	-443000
		4	863000
Interest Rate	1%	NPV	$   32,469.59	=$D$3+NPV(B8,$D$4:$D$7)
	2%		$   25,718.31	=$D$3+NPV(B8,$D$4:$D$7)
	3%		$   19,689.49	=$D$3+NPV(B8,$D$4:$D$7)
	4%		$   14,330.69	=$D$3+NPV(B8,$D$4:$D$7)
	5%		$      9,593.36	=$D$3+NPV(B8,$D$4:$D$7)
	6%		$      5,432.54	=$D$3+NPV(B8,$D$4:$D$7)
	7%		$      1,806.56	=$D$3+NPV(B8,$D$4:$D$7)
	8%		$   (1,323.20)	=$D$3+NPV(B8,$D$4:$D$7)
	9%		$   (3,992.58)	=$D$3+NPV(B8,$D$4:$D$7)
	10%		$   (6,234.82)	=$D$3+NPV(B8,$D$4:$D$7)
	11%		$   (8,080.79)	=$D$3+NPV(B8,$D$4:$D$7)
	12%		$   (9,559.15)	=$D$3+NPV(B8,$D$4:$D$7)
	13%		$ (10,696.54)	=$D$3+NPV(B8,$D$4:$D$7)
	14%		$ (11,517.71)	=$D$3+NPV(B8,$D$4:$D$7)
	15%		$ (12,045.68)	=$D$3+NPV(B8,$D$4:$D$7)
	16%		$ (12,301.85)	=$D$3+NPV(B8,$D$4:$D$7)
	17%		$ (12,306.15)	=$D$3+NPV(B8,$D$4:$D$7)
	18%		$ (12,077.11)	=$D$3+NPV(B8,$D$4:$D$7)
	19%		$ (11,632.00)	=$D$3+NPV(B8,$D$4:$D$7)
	20%		$ (10,986.88)	=$D$3+NPV(B8,$D$4:$D$7)
	21%		$ (10,156.75)	=$D$3+NPV(B8,$D$4:$D$7)
	22%		$   (9,155.54)	=$D$3+NPV(B8,$D$4:$D$7)
	23%		$   (7,996.26)	=$D$3+NPV(B8,$D$4:$D$7)
	24%		$   (6,691.05)	=$D$3+NPV(B8,$D$4:$D$7)
	25%		$   (5,251.20)	=$D$3+NPV(B8,$D$4:$D$7)
	26%		$   (3,687.26)	=$D$3+NPV(B8,$D$4:$D$7)
	27%		$   (2,009.07)	=$D$3+NPV(B8,$D$4:$D$7)
	28%		$       (225.80)	=$D$3+NPV(B8,$D$4:$D$7)
	29%		$      1,653.98	=$D$3+NPV(B8,$D$4:$D$7)
	30%		$      3,622.28	=$D$3+NPV(B8,$D$4:$D$7)
	31%		$      5,671.64	=$D$3+NPV(B8,$D$4:$D$7)
	32%		$      7,795.10	=$D$3+NPV(B8,$D$4:$D$7)
	33%		$      9,986.16	=$D$3+NPV(B8,$D$4:$D$7)
	34%		$   12,238.74	=$D$3+NPV(B8,$D$4:$D$7)
	35%		$   14,547.18	=$D$3+NPV(B8,$D$4:$D$7)
	36%		$   16,906.18	=$D$3+NPV(B8,$D$4:$D$7)
	37%		$   19,310.82	=$D$3+NPV(B8,$D$4:$D$7)
	38%		$   21,756.46	=$D$3+NPV(B8,$D$4:$D$7)
	39%		$   24,238.82	=$D$3+NPV(B8,$D$4:$D$7)
	40%		$   26,753.85	=$D$3+NPV(B8,$D$4:$D$7)
Since NPV changes sin two times, there is 2 irr				7.56% and 28.12%
1		Year	Cash Flow		Year	Cash Flow
		0	506000		0	506000
		1	-443000		1	-443000
		2	-443000		2	-443000
		3	-443000		3	-443000
		4	863000		4	863000
		IRR	7.56%		IRR	28.12%
		Hint	=IRR(Values0 : 4))		Hint	=IRR(Values0 : 4, 40%)
2	at 10% rate there is negative npv of 6234.82 so its not attractive
3	IRR of the opportunity will be 7.56%		8%
4	NO