In preparing for your upcoming meeting with administrative managers, you decide to review some of what you know about capital investment analysis and the impact of transactions on liquidity, solvency, and profitability

ADMG 302 Final Project - Step 3 (15 points)
In preparing for your upcoming meeting with administrative managers, you decide to review some of what you know about capital investment analysis and the impact of transactions on liquidity, solvency, and profitability, in case a manager asks your opinion of an investment proposal. Here is a good example of something that could be discussed in the meeting.
Proposal for a new Inventory Management System (hardware and software)
Cost of new hardware and software: (assume 4-year life, purchased with cash at beginning of first year) $500,000
New system would result in a decrease in average inventory of approximately 10% $20,000,000 decrease
With a decrease in inventory levels, there would be a decrease in annual Cost of Goods Sold (due to less storage costs, insurance costs, less obsolete inventory, etc.) (Treat this as increase in annual cash flows) This amount does not include depreciation. $200,000 decrease
Life of new Inventory Management System (life of the project) 4 years
How many years would it take for this project to pay itself off? (Calculate the Payback Period.) Round your answer to one decimal place.
Based on the payback period (as compared to the project life), should the project be considered any further? Calculate the project’s Net Present Value (NPV). Assume IPGP’s required rate of return is 15%. (You will need to use a present value table from Chapter 15. Ask yourself if you are working with the present value of an annuity or the present value of one amount.)
Annual Cash Flows
Present Value Factor
Present Value of Annual Cash Flows
Initial investment $500,000
Net Present Value (NPV)
The effects of this project are shown below. In Year 1, remember the purchase is included, as well as the annual changes. Assume no other accounts (including Sales) are affected. (Calculate the amount of increase or decrease.)
Cash: Year 1: $500,000 decrease and $200,000 increase = $300,000 decrease $300,000 decrease
Years 2-4 $200,000 increase
Average Inventory $20,000,000 decrease
Equipment and Software $500,000 increase
Annual Depreciation (assume straight-line with no residual value, depreciate equipment and software together)
Annual cash-basis COGS (not including depreciation) $200,000 decrease
Annual accrual-basis COGS
Annual Gross Profit (accrual-basis)
Annual accrual-basis Operating Income and Net Income (increase to each one)
Enter your answers into Cengage. You are allowed unlimited attempts on each answer. After you have all the correct answers, print out this sheet. The last six questions in Step 4 of the assignment are related to this analysis.
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