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In preparing for your upcoming meeting with administrative managers, you decide to review some of what you know about capital investment analysis and the impacts
In preparing for your upcoming meeting with administrative managers, you decide to review some of what you know about capital investment analysis and the impacts of transactions on liquidity, solvency, and profitability, in case a manager asks your opinion about an investment proposal. Here is an 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) The new system would result in a decrease in average inventory of approximately 1%. $2,000,000 With a decrease in inventory levels, there would be a decrease in the costs to carry the inventory each year there would be $100,000 less interest on loans to purchase inventory, $700,000 less storage and insurance costs, less obsolete inventory, etc.) (Treat this as an increase in annual cash flows) This amount does not include depreciation. $800,000 Life of new Inventory Management System (life of the project) How many years would it take for this project to pay for itself? (Calculate the Payback Period.) Round your answer to one decimal place. 4 year: Calculate the project's Net Present Value (NPV). Assume IPGP's required rate of return is 10%. (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 $800,000 Present Value Factor In preparing for your upcoming meeting with administrative managers, you decide to review some of what you know about capital investment analysis and the impacts of transactions on liquidity, solvency, and profitability, in case a manager asks your opinion about an investment proposal. Here is an 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) The new system would result in a decrease in average inventory of approximately 1%. $2,000,000 With a decrease in inventory levels, there would be a decrease in the costs to carry the inventory each year there would be $100,000 less interest on loans to purchase inventory, $700,000 less storage and insurance costs, less obsolete inventory, etc.) (Treat this as an increase in annual cash flows) This amount does not include depreciation. $800,000 Life of new Inventory Management System (life of the project) How many years would it take for this project to pay for itself? (Calculate the Payback Period.) Round your answer to one decimal place. 4 year: Calculate the project's Net Present Value (NPV). Assume IPGP's required rate of return is 10%. (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 $800,000 Present Value Factor
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