701 (similar to) Question Help Your firm has been hired to develop new software

Question

701 (similar to) Question Help Your firm has been hired to develop new software for the university's class registration system. Under the contract, you will receive $493,000 as an upfront payment You expect the development costs to be $443,000 per year for the next 3 years. Once the new system is in place, you will receive a final payment of $876,000 from the university 4 years from now a what are the IRRs ofthis opportunity? Hint Build an Excel model which tests the NPV at 1% nte alsfo 1% to 40% Then zero n ontherates at wh chthe 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? a. what are the RRs of this opportunity? (Hint Build an Excel model which tests the NPV at 1%) tervats 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 )

Explanation / Answer

a NPV at 6% Year Inflow Annual Outflow Total inflow 1/(1+.06)^n PV 0          4,93,000        4,93,000 1       4,93,000 1 -443000      (4,43,000) 0.943396     (4,17,925) 2 -443000      (4,43,000) 0.889996     (3,94,268) 3 -443000      (4,43,000) 0.839619     (3,71,951) 4          8,76,000        8,76,000 0.792094       6,93,874             2,730 NPV at 7% Year Inflow Annual Outflow Total inflow 1/(1+.07)^n PV 0          4,93,000        4,93,000 1       4,93,000 1 -443000      (4,43,000) 0.934579     (4,14,019) 2 -443000      (4,43,000) 0.873439     (3,86,933) 3 -443000      (4,43,000) 0.816298     (3,61,620) 4          8,76,000        8,76,000 0.762895       6,68,296           (1,276) Assumed no taxes IRR=6+2730/(2730+1276)*(7-6) IRR 6.68% b If cost of Capital is 10% then this opportunity is not Viable as it is greater than IRR or 10%>6.68% c Renogotiate the term NPV at 6% 99% Year Inflow Annual Outflow Total inflow 1/(1+.06)^n PV 0          4,93,000        4,93,000 1       4,93,000 1 -443000      (4,43,000) 0.502513     (2,22,613) 2 -443000      (4,43,000) 0.252519     (1,11,866) 3 -443000      (4,43,000) 0.126894        (56,214) 4       12,00,000      12,00,000 0.063766           76,519       1,78,826 NPV at 7% 80% Year Inflow Annual Outflow Total inflow 1/(1+.07)^n PV 0          4,93,000        4,93,000 1       4,93,000 1 -443000      (4,43,000) 0.555556     (2,46,111) 2 -443000      (4,43,000) 0.308642     (1,36,728) ` 3 -443000      (4,43,000) 0.171468        (75,960) 4       12,00,000      12,00,000 0.09526       1,14,312       1,48,512 Assumed no taxes IRR=6+259368/(259368-245902)*(7-6) At 99% discount factor NPV is becoming Higher whereas at 80% NPV is low, whereas 99%>80% so there is no IRR d At all discount factor this project is viable

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