You wish to start a new line of software. Your initial investment in the project will be $100,000. You do not expect to generate any cash flows for the first 2 years. However, cash flows in year 3 are expected to be $16,000 and are expected to increase by 15% every year till year 7, after which time they will decline by 2% until year 9. You do not expect any growth in cash flows beyond year 9. However, you expect your business to generate constant cash flows into the foreseeable future.
a. Assuming that your cost of capital is 8% per year, should you pursue the project if your objective is to accept projects only when they are worth more than their cost?
b. Explain your answer to part (a) above. What technique did you use in your answer to part (a)?
c. By what time frame do you expect to recover your initial investment in the project: (1) ignoring the time value of money and (2) taking into account the time value of money? Name the techniques you have used for your computation. What are the benefits and drawbacks to these techniques?
d. Can you find the IRR for this project?