I need assistance with solution to following problem: Innovation Company is thin

Question

I need assistance with solution to following problem: Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.93 million. The product is expected to generate profits of $1.18 million per year for ten years. The company will have to provide product support expected to cost $94,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 5.9%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.1% and 17.6%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investme

Explanation / Answer

Present value of product suport cost = 94,000/0.059 = 1,593,220.34

total investment = 4,930,000 + 1,593,220.34 = 6,523,220.34

NPV = 2,202,977.88...........invest at 5.90%

At .1.1%, NPV = -2,359,032.25............reject

NPV at 17.60% = -84,790.30

IRR = 17.09%

5.90% Cash flows Year Discounted CF    (6,523,220.34) 0 -6523220.34      1,180,000.00 1 1114258.73      1,180,000.00 2 1052180.11      1,180,000.00 3 993560.06      1,180,000.00 4 938205.92      1,180,000.00 5 885935.71      1,180,000.00 6 836577.63      1,180,000.00 7 789969.43      1,180,000.00 8 745957.92      1,180,000.00 9 704398.41      1,180,000.00 10 665154.30

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