LogicSoft Inc., a start-up that provides enterprise logistic software to transportation companies, is in negotiations with a new customer for a sales contract. The software is highly customized and thus requires consultants to implement the software. Developed 2 years ago, the base software was created by a core team of 10 programming engineers at a cost of $1.5 million. LogicSoft's workforce is currently 100% utilized and thus would be required to hire an additional 15 programmers in order to perform the implementation. The full cost of each worker is expected to be $75,000, and the company expects them to work on other projects after the 2-year implementation effort. In addition to the cost of the software and implementation, LogicSoft would also provide upgrades, updates, and maintenance for the 3 years following the successful implementation, which would cost LogicSoft $50,000 per year. The potential customer has made a final offer with the following structure:
LogicSoft also requires customers to keep the pricing of the arrangement confidential. Therefore this contract would not have any impact on the pricing of future sales. LogicSoft's cost of capital is 15%. The company is barely profitably, therefore is not generating any material taxable income, or losses to be carried forward.