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nnovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.98 million. The product is expected to generate profits of $1.05 million per year for ten years. The company will have to provide product support expected to cost $90,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a What s the NPV of this investment if the cost of capital is 6.1%? Should the firm undertake the pr ect? Repeat the analysis fo dscount rates 15 and 136 respectively b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment?

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Answer #1

We will use NPV and IRR formula to calculate as per image attached.

The cash flows are

Year Cash flows
0 -4.98
1 1.05
2 1.05
3 1.05
4 1.05
5 1.05
6 1.05
7 1.05
8 1.05
9 1.05
10 1.05

a:

Rate NPV in millions
6.10% 2.711609
1.50% 4.703294
13.60% 0.583504

b: IRR is 16.51%

Since IRR is greater than the cost of capital, the project should be undertaken.

AutoSave Book1 Excel (Product Activation Failed) Sign in File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do Share Calibri General Conditional Fornat as Cell Insert Delete Fornat FormattingTable Styles- 、. Sort & Find & Editing Paste . 녀 . 의 _ . 로三들經垣臣 Merge & Center-5 . % , : Filter Select Clipboard Font Alignment Number Styles Cells D1 xRate Cash flows 4.98 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1 Year Rate NPV 0.061 NPV (D2,SB$3:$B$12)+SB$2 0.015 NPV(D3,SB$3:$B$12)+ŞB$2 0.136 NPV(D4,SB$3:$B$12)+ŞB$2 4 2 IRR IRR(B2:B12) 10 8 11 9 12 10 13 14 15 16 17 Sheet1 Ready + 100 cENG 10:48 AM

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