Problem:
Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product is $5 million. The product is expected to generate profits of $1 million per year for 10 years. The company will have to provide product support expected to cost $100000 per yr.in perpetuity. Assume all profits and expenses occur at the end of the year.
Q1. What is the NPV of this investment if the cost of capitol is 6%. Should the firm undertaken the project? Repeat the analysis for the discount rate of 2% and 12%.
Q2. How many IRR's does this investment opportunity have ?
Q3. Can the IRR rule be used to evaluate this investment? Explain.