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Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.92 million. The product is expected to generate profits of $1.01 million per year for ten years. The company will have to provide product support expected to cost S93,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 6.4%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.8% and 12.6%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment?

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B58 xfIR(B46:B56) 44 Year | Cash flows PVIF@6.4% 45 Present value Ax B 0 $ (6,373,125) 1 $ 1,010,000 2 $ 1,010,000 3 1,010,000 4 $ 1,010,000 5$ 1,010,000 6 $ 1,010,000 7 $ 1,010,000 8$ 1,010,000 9 $ 1,010,000 56 10 1,010,000 1.000$ 0.940 $ 0.883 $ 0.830 $ 0.780 $ 0.733 $ 0.689| $ 0.648 $ 0.609 $ 0.572| $ 0.538 $ 6,373,125.00)-4920000-93000/6.4% 47 48 49 50 51 52 53 54 949,248.12 892,150.49 838,487.30 788,051.98 740,650.35 696,099.96 654,229.28 614,877.14 577,892.05 543,131.63 57 58 IRR 9.39% 60 Net present value $921,693.30 61 62 Yes, undertake project.

B58 xfIR(B46:B56) 44 Year | Cash flows | PVIF@1.8% 45 46 0$(10,086,667) 47 48 49 50 51 52 53 54 Present value A×B 1.000 $ 0.982| $ 0.965 $ 0.948 $ 0.931 $ 0.915 $ 0.898 $ 0.883| $ 0.867 $ 0.852 $ 0.837 $ 10,086,666.67)--4920000-93000/1.8% 1 $ 1,010,000 2 $ 1,010,000 3 $ 1,010,000 4 $ 1,010,000 5$ 1,010,000 6 $ 1,010,000 7 $ 1,010,000 8 $ 1,010,000 9 $ 1,010,000 992,141.45 974,598.68 957,366.09 940,438.20 923,809.63 907,475.08 891,429.35 875,667.34 860,184.02 844,974.48 56 10$ 1,010,000 57 58 IRR 0.02% 60 Net present value$(918,582.36) 61 62 No, Reject project.

B58 xfIR(B46:B56) 44 Year Cash flows PVIF@12.6 45 Present value A×B 0 5 (5.658.095 1 $ 1,010,000 2 $ 1,010,000 3 $ 1,010,000 4 $ 1,010,000 5$ 1,010,000 6 $ 1,010,000 7 $ 1,010,000 8 $ 1,010,000 9 $ 1,010,000 1.000 $ 0.888 $ 0.789 $ 0.700 $ 0.622 $ 0.552 $ 0.491 $ 0.436 $ 0.387 $ 0.344 $ 0.305 $ (5,658,095.24)--4920000-93000/12.6% 47 48 49 50 51 52 53 54 896,980.46 796,607.87 707,467.03 628,301.09 557,993.86 495,554.05 440,101.29 390,853.72 347,116.98 308,274.41 56 10$ 1,010,000 57 581 IRR 12.21% 60 Net present value$ (88,844.49) 61 62 No, Reject project.

As per IRR and NPV undertake the project only at 6.4%

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