Your firm has been hired to develop new software for the university's class registration system. Under the contract, you will receive

$490,000

as an upfront payment. You expect the development costs to be

$449,000

per year for the next

3

years. Once the new system is in place, you will receive a final payment of

$897,000

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

$1.3

million.

c. What is the IRR of the opportunity now?

d. Is it attractive at the new terms?