Suppose you are considering a project to develop a new software package. You and your team are making a list of the revenues and costs that are relevant in the computation of the project’s NPV. For each of the following please provide a short answer indicating how much (if any) of the following revenues and costs are relevant to this project and why.
a.) Your firm recently purchased 50 new computers (at a total cost $100,000) that are suitable for writing the new software. The computers were purchased because Purchasing got a ‘great deal’ on them, but they are currently unused with no plans for their future use. According to facilities, the computers could be sold now for $52,000.
b.) Your firm has an existing 20,000 square foot building that will work nicely for the project. Your firm pays $720,000 in rent per year on the space. If the space is not used on the new project, the lease on the space will be canceled and the firm will forfeit a $200,000 deposit and have no further obligation with respect to the lease. In addition, your firm allocates a portion of corporate overhead by square foot. The charge is $3 per square foot.
c.) The new project requires 25 software engineers that will have to be newly hired at an annual cost of $2.5M per year. In addition to the salaries of the new engineers, corporate HR will charge the new project a one-time ‘fee’ of $25K per new hire to “cover the cost” of maintaining the HR department.