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?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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