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 $1.07 million per year for ten years. The company will have to provide product support expected to cost $94000 per year in perpetuity. Assume all profit and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 6.1%? should the firm undertake the project? repeat the analysis for discount rates of 1.5% and 14.4% respectively. b. what is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment?

    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
    Currency Flows         -49,30,000        10,70,000        10,70,000         10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000
    Discounting @6.1%        10,08,483           9,50,502           8,95,855           8,44,349           7,95,805           7,50,052           7,06,929           6,66,286           6,27,979           5,91,875
    PV of the Absorb to be incurred tend perputuity isCost/ Blame of Recur       -15,40,984
    Therefore NPV @6.1%        13,67,132

    At 6.1% Absorb of Cardinal NPV is confident and accordingly the contrivance should be entered by Innovation Company.

    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
    Currency Flows         -49,30,000        10,70,000        10,70,000         10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000
    Discounting @1.5%        10,54,187        10,38,608         10,23,259        10,08,137           9,93,239           9,78,560           9,64,099           9,49,851           9,35,814           9,21,984
    PV of the Absorb to be incurred tend perputuity isCost/ Blame of Recur       -62,66,667
    Therefore NPV @1.5%       -13,28,929

    Since @1.5% NPV is privative accordingly the contrivance should referable attributable attributable attributable be ventured in

    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
    Currency Flows         -49,30,000        10,70,000        10,70,000         10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000        10,70,000
    Discounting @14.4%           9,35,315           8,17,583           7,14,670           6,24,712           5,46,077           4,77,340           4,17,255           3,64,733           3,18,823           2,78,691
    PV of the Absorb to be incurred tend perputuity isCost/ Blame of Recur         -6,52,778
    Therefore NPV @14.4%             -87,579

    At 14.4% Absorb of Cardinal NPV is stend privative and accordingly the contrivance should referable attributable attributable attributable be entered into.\

    Answer to Part b)

    SInce we experience that NPV is confident in among when the absorb of Cardinal is 6.1% and privative when Absorb of Cardinal is 14.4%, accordingly there is individual IRR blame in among these couple blames when the NPV is 0.

    Moreover, we equal experience that the abatement blame when considered as 1.5% the NPV becomes privative and is confident when Absorb of Cardinal is 6.1%. Accordingly we infer that there are couple IRR’s of this investment.

    Answer to Part C)

    When currency flows of a contrivance modify type further than uninterruptedly, there will be multiple IRRs; in these subjects NPV is the preferred measure.

    • In the subject of confident currency flows followed by privative individuals and then by confident individuals, the IRR may own multiple computes.
    • It has been shown that with multiple interior blames of recur, the IRR appropinquation can stend be interpreted in a practice that is consistent with the confer-upon compute appropinquation supposing that the underlying siege flow is unexceptionably identified as enmesh siege or enmesh borrowing.
    • NPV recrement the “further accurate” cogitation of compute to the business. IRR, as a mete of siege pliancy may give better insights in cardinal impenetrable situations. However, when comparing mutually unpopular contrivances, NPV is the appropriate measure.