Question: A one Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are 5 million dollar. The product is expected to generate profits of 1 million dollar each year for 10 years. The company will have to provide product support expected to cost $100,000 per year in perpetuity. Suppose all profits and expenses occur at the end of the year.
[A] Calculate the NPV of this investment if the cost of capital is 6 percent? Should the firm under take the project? Repeat the analysis for discount rates of 2% and 11%.
[B] Determine how many IRRs does this investment opportunity have?
[C] Determine what does the IRR rule indicate about this investment?