Your firm has been hired to develop new software for the university’s class registration system. Under the
contract, you will recieve $491,000 as an upfront payment. You expect the development costs to be $456,000 per year for the next 3 years. Once the new system is in place, you will recieve a final payment of $917,000 from the university 4 years from now.
a) what are the irrs of this opportunity?
the irrs of the project in ascending order are __% and ____%?
(Hint: Build an excel model which tests the NPV at 1% intervals from1% to 40%. Then zero in on the rates at which the NPV changes signs.
b) if your cost of capital is 10%, is the opportunity attractive?
c) what is the irr of the opportunity now?
d) is it attractive at the new terms?
AOL is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $25 million upfront investment and will generate $20 million in savings for AOL each year for the next 3 years. The second bid from Cisco requires a $86 million upfront investment and will generate $60 million in savings each year for the next 3 years.
a) What is the irr for AOL associated with each bid?
b) If the capital cost for each investment is 18%, what is the net present value (NPV) of each bid? Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Aol will pay $20 million upfront, and $35 million per year for the next 3 years. AOL’s savings will be the same as with Cisco’s original bid.
c) What is the irr for the cisco bid now?
d) what is the new npv?
e) What should aol do?