Question: 1. Your firm has been hired to develop new software for the university's class registration system. Under the contract, you will receive $500,000 as an upfront payment. You expect the development costs to be $450,000 per year for the next 33 years. Once the new system is in place, you will receive a final payment of $900,000 from the university 44 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 44 will be $ 1.0 million.
c. What is the IRR of the opportunity now?
d. Is it attractive at the new terms?
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.) The IRRs of the project in ascending order are _____% and ______%. (Round to two decimal? places.)
B. If your cost of capital is 10 %, is the opportunity attractive? If your cost of capital is 10 %?
(a) the opportunity is it attractive
(b) is it not attractive
Suppose you are able to renegotiate the terms of the contract so that your final payment in year 4 will be $1.0 million.
C. What is the IRR of the opportunity now? (Select the best choice below.)
A. Now there are 3 IRRs.
B. The IRR rule always gives the wrong answer.
C. Now there are no IRRs.
D. The IRR rule works as before.
D. Is it attractive at the new terms? If your cost of capital is 10%, the opportunity______
(a) attractive
(b) is not attractive