Your firm has been hired to develop new software for the university's class registration system. Under the contract, you will receive $497,000 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 $866,000 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?