To calculate the Net Present Value (NPV) of this opportunity, we use the formula:

$NPV = \sum \frac{C_t}{(1 + r)^t} - I_0$

where:

• $C_t$ is the cash flow at time $t$.
• $r$ is the discount rate (cost of capital).
• $t$ is the time period.
• $I_0$ is the initial investment or upfront payment.

For your scenario:

1. Upfront payment (immediate inflow): $502,000.
2. Development costs (outflows for the next 3 years): $455,000 each year for 3 years.
3. Final payment (inflow at the end of 4 years): $903,000.
4. Discount rate $r$: 10% or 0.10.

The formula for NPV in this case will be:

$NPV = 502,000 - \frac{455,000}{(1 + 0.10)^1} - \frac{455,000}{(1 + 0.10)^2} - \frac{455,000}{(1 + 0.10)^3} + \frac{903,000}{(1 + 0.10)^4}$

Steps to Calculate:

1. Discount each cash flow to its present value.
2. Sum the discounted cash flows, including the initial inflow of $502,000.
3. Subtract the development costs from this total.

Would you like a step-by-step calculation with this formula, or any further assistance?

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Follow-up Questions:

1. How would the NPV change if the cost of capital increased to 12%?
2. What would be the impact on NPV if development costs rose to $500,000 per year?
3. How does extending the payment period affect the NPV?
4. How would changing the final payment amount influence the NPV?
5. Why is discounting cash flows important in NPV calculations?

Tip:

Remember, a positive NPV indicates a profitable investment under the given cost of capital.