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 $442,000 per year for the next three years. Once the new system is in place, you will receive a final payment of $874,000 from the university four years from now.

a. What are the IRRs of this opportunity?

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 these terms?

AppendixLO1