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Basic IRR Analysis

Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be $2,250,000, but it would produce after-tax savings of $450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving $450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the project's economic viability. All capital projects are required to earn at least the firm's cost of capital, which is 12 percent.

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

Required:

1. Calculate the project's internal rate of return. Enter your answers as whole percentage values (for example, 10% should be entered as "10" in the answer box).

Between fill in the blank 1 % and fill in the blank 2 %

Should the company acquire the new IT system?

YesNoYes

2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firm's cost of capital. Round your answer to the nearest dollar. $fill in the blank 4

What is the amount of the safety margin (rounded to the nearest dollar)? $fill in the blank 5

3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Enter your percentage answers as whole percentage values (for example, 10% should be entered as "10" in the answer box). Round the cash flow amount to the nearest dollar.

IRR	Between fill in the blank 6	%	and	fill in the blank 7	%
Minimum cash flow	$fill in the blank 8

4. Describe the data analytic type or types that apply to Requirement 1. Discuss the effect on your answer by the analyses that take place in Requirements 2 and 3. See Exhibits 2.5 and 2.6, pp. 37, 40, for a brief review of data analytics.

DescriptiveDiagnosticPredictivePrescriptivePredictive