Finding the annual accrual-basis COGS, annual Gross Profit (accrual-basis), and

Question

Finding the annual accrual-basis COGS, annual Gross Profit (accrual-basis), and annual accrual-basis Operating Income and Net Income (increase to each one) for the following scenario:

The answers I filled out are correct. I just need help solving the last three boxes. Please help!

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) New system would result in a decrease in average inventory of approximately 10% 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 $500,000 $20,000,000 decrease $200,000 decrease 4 years 2.5 Life of new Inventory Management System (life of the project) 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? Yes 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 Net Present Value (NPV) $200,000 $571,000 $500,000 $71,000 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 $200,000 increase $20,000,000 decrease $500,000 increase Years 2-4 Average Inventory Equipment and Software Annual Depreciation (assume straight-line with no residual value, depreciate equipment and software together) Annual cash-basis COGS (not including depreciation) 125000 $200,000 decrease Annual accrual-basis COGS Annual Gross Profit (accrual-basis) Annual accrual-basis Operating Income and Net Income (increase to each one)

Explanation / Answer

Annual accrual basis COGS (200000+125000) 325000 Decrease Annual accrual basis Gross Profit 325000 Increase Annual accrual basis Opg.income & Net Income 325000 Increase

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