Your firm has been hired to develop new software for the university's class registration system....
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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?
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