Question

Your firm has been hired to develop new software for the​ university's class registration system. Under the​ contract, you will receive $ 506,000 as an upfront payment. You expect the development costs to be $ 441,000 per year for the next 3 years. Once the new system is in​ place, you will receive a final payment of $ 857,000 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 $ 1.2 million.  

c. What is the IRR of the opportunity​ now? d. Is it attractive at the new​ terms?

Answer 1

1.
506000-441000/(1+r)-441000/(1+r)^2-441000/(1+r)^3+857000/(1+r)^4=0

=>IRR=7.7982% and 27.297%

2.
The opportunity is not attractive

3.
506000-441000/(1+r)-441000/(1+r)^2-441000/(1+r)^3+1200000/(1+r)^4=0

=>IRR not defined

4.
Yes it is attractive