Professor wants to expropriate submitted code for commercial use

I'm a Computer Science graduate student enrolled in a US University. In a class I'm currently taking, the professor has just given us a strange assignment. The professor works full-time in industry and is teaching classes at the University by night.

He has given us a piece of legacy code from the company where he works, which he doesn't have time to deal with. Our assignment is to optimize this piece of code for him. For full credit, we must obtain a 10% performance increase, but the professor isn't sure that this is even possible. He has also stated that he will take the best solution and use it in his commercial applications at work.

Additionally, the professor has offered cash prizes for the top 4 or 5 students, ranging from $50 - $400.

I have several issues with this:

1. 
   

   A successful assignment is going to require something new and/or novel to accomplish it, since the professor isn't sure how to do it himself. I'm not ok with just giving him and his company the copyright and other IP rights to the code I create to do this.

   
   


2. 
   

   There's no direct educational goal associated with this assignment. He's simply offloading work he doesn't have time for or can't accomplish to his class.

   
   


3. 
   

   To me, it seems unethical to try to monetarily incentivize the class to perform better at the work.

   
   

My questions:

Are my concerns legitimate and should I get my adviser or the department head involved?

Is there some way I can opt out of the assignment and request an alternative assignment to complete, based on my IP concerns?

Update:

I checked my university's IP policy and students do indeed retain all rights to works created without financial backing from the university. Also, it seems other students had similar concerns and got the department involved before I even had a chance to. The department had the professor alter the assignment so that the requirements were more clearly defined and he doesn't stand to gain much from students answers.