Question

Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.99 million. The product is expected to generate profits of $1.19 million per year for ten years. The company will have to provide product support expected to cost $97,000 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

6.3 %6.3%​?

Should the firm undertake the​ project? Repeat the analysis for discount rates of 1.1% and 17.4%​, respectively.

b. What is the IRR of this investment​ opportunity?  

c. What does the IRR rule indicate about this​ investment?

What is the NPV of this investment if the cost of capital is 6.3%​? Should the firm undertake the​ project? Repeat the analysis for discount rates of 1.1% and 17.4%​, respectively.

If the cost of capital is 6.3%​, the NPV will be $​__. (Round to the nearest​ dollar.)

Should the firm undertake the​ project?  ​(Select the best choice​ below.)

A.

No comma because the NPV is less than zeroNo, because the NPV is less than zero.

B.

​No, because the NPV is not greater than the initial costs.

C.

Yes comma because the NPV is equal to or greater than zeroYes, because the NPV is equal to or greater than zero.

D.

There is not enough information to answer this question.

When r equals 1.1 %r=1.1%​, the NPV will be ​$___. ​(Round to the nearest​ dollar.)

When r equals r=17.4%​, the NPV will be ​$____.​ (Round to the nearest​ dollar.)

b. What is the IRR of this investment​ opportunity?  ​(Select all the choices that​ apply.)

A.From the answer to

​(a​)there are at least twoIRRs.

B.There is at least one IRR between 1.1%and 6.3%.

C.There is at least one IRR between 6.3 % and 17.4%.

D.There is only one IRR between 1.1% and 17.4%.

c. What does the IRR rule indicate about this​ investment?  ​(Select the best choice​below.)

A.Since at least one of the

IRRs

is higher than the discount​ rate, the IRR rule says to take the project.

B.The IRR rule says nothing in this case because there are two

IRRs.

C. In this​ case, the IRR rule says you can either take or not take the project.

D.Since at least one of th eIRRs is lower than the discount​ rate, the IRR rule says to not take the project.

Answer 1