RA Technologies Ltd is a mid-sized IT solutions firm that provides a number of services to small and medium-sized enterprises (SMEs).

The director of the company is considering a major investment in their IT system and infrastructure to make it more efficient, robust, integrated, competitive and future proof. The new system will require less maintenance and administration than the current one. The director has already spent 3000 in trialing the new IT system a few months ago and she was very impressed by it.

The finance team believes that the total cost of the company will fall considerably following the investment in the new system. The team has supplied the following information on the project.

Year	Project net cash flows ()
Year 0	(250,000)
Year 1	77,000
Year 2	87,000
Year 3	78,000
Year 4	69,000
Year 5	45,000

As the investment requires a huge capital outlay, the director of the company, although optimistic, has asked for you to review it.

The company uses straight-line method of depreciation and its cost of capital (i.e. the discount rate) is 15%. It is assumed that the project will have a residual value of 20,000 at the end of the five years.

• a.Briefly explain why businesses undertake investment appraisal when making long-term decisions. (5 marks)
• b.Calculate the Internal Rate of Return (IRR) for the investment. You are required to show all your workings to support your answers. (9 marks)
• c.Based on the results from calculations in part (b), should the company invest in the proposed IT system? Explain your answer. (2 marks)
• d.Without doing any calculations, would your decision change if the cost of capital increased to 17%? (3 marks)
• e.In your own words, discuss whether the IRR method is as reliable as the Net Present Value rule as an investment appraisal technique. (10 marks)