Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Question
I just need to verify that these IRRs are correct.
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 $447,000 per year for the next 3 years. Once the new system is in place, you will receive a final payment of $881,000 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? ... The IRRs of the project in ascending order are 6.75% and 31.68 %. (Round to two decimal places.) b. If your cost of capital is 10%, is the opportunity attractive? If your cost of capital is 10%, the opportunity is not attractive (Select from the drop-down menu.) ●
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Transcribed Image Text: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 $447,000 per year for the next 3 years. Once the new system is in place, you will receive a final payment of $881,000 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? ... The IRRs of the project in ascending order are 6.75% and 31.68 %. (Round to two decimal places.) b. If your cost of capital is 10%, is the opportunity attractive? If your cost of capital is 10%, the opportunity is not attractive (Select from the drop-down menu.) ●
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