Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.91 million. The product is expected to generate profits of $1.19 million per year for 10 years. The company will have to provide product support expected to cost $98,000 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 6.2% ? Should the firm undertake the project? Repeat the analysis for discount rates of 1.1% and 17.8%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment?
Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.91 million. The product is expected to generate profits of $1.19 million per year for 10 years. The company will have to provide product support expected to cost $98,000 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 6.2% ? Should the firm undertake the project? Repeat the analysis for discount rates of 1.1% and 17.8%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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for part a, Repeat the analysis for discount rates of 6.2%, 1.1% and 17.8%, respectively and then solve part b and c, thanks
Transcribed Image Text:Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.91 million. The product is expected to generate profits of $1.19 million per year for 10 years. The company will have to provide product support expected to cost
$98,000 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 6.2% ? Should the firm undertake the project? Repeat the analysis for discount rates of 1.1% and 17.8%, respectively.
b. What is the IRR of this investment opportunity?
c. What does the IRR rule indicate about this investment?
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