Question
Your firm has been hired to develop new software for theuniversity's class registration system. Under thecontract, you will receive $506,000 as an upfront payment. You
Your firm has been hired to develop new software for theuniversity's class registration system. Under thecontract, you will receive $506,000 as an upfront payment. You expect the development costs to be $453,000 per year for the next 3 years. Once the new system is inplace, you will receive a final payment of $893,000 from the university 4 years from now.
a. What are the IRRs of thisopportunity?(Hint: Build an Excel model which tests the NPV at1% intervals from1% to40%. Then zero in on the rates at which the NPV changessigns.)
b. If your cost of capital is 10%, is the opportunityattractive?
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 opportunitynow?
d. Is it attractive at the newterms?
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