Your firm spends $$426,000$ per year in regular maintenance of its equipment. Due to the economic downturn,

the firm considers forgoing these maintenance expenses for the next three years. If it does so$,$ it expects it will

need to spend $$1\mathrm{.}9$ million in year $4$ replacing failed equipment.

a$.$ What is the IRR of the decision to forgo maintenance of the equipment?

b$.$ Does the IRR rule work for this decision?Your firm has been hired to develop new software for the university's class registration system. Under

the contract, you will receive $$510,000$ as an upfront payment. You expect the development costs to be

$$436,000$ per year for the next $3$ years. Once the new system is in place, you will receive a final payment o

$$838,000$ 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\mathrm{.}2$ million.

c$.$ What is the IRR of the opportunity now?

d$.$ Is it attractive at the new terms?

c$.$ For what costs of capital is forgoing maintenance a good decision?