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Question: The management of Kleinburg Industrial Bakery is

The management of Kleinburg Industrial Bakery is analyzing two competing investment projects and they must decide which one can be done immediately and which one can be postponed for at least a year. The details of each proposed investment are shown on the next page. The bakery has a 12% required rate of return to evaluate all investments that directly impact operations and amortizes the investment in plant and equipment using straight-line depreciation over 10 years on the difference between the initial investment and terminal disposal price. Required: 1. Calculate the net present value of each proposal. 2. Which project should the bakery choose on the basis of the NPV calculations? 3. Mention which strategic factors must be considered by the managers when ranking the projects.
The management of Kleinburg Industrial Bakery is analyzing two competing investment projects and they must decide which one can be done immediately and which one can be postponed for at least a year. The details of each proposed investment are shown on the next page.
The bakery has a 12% required rate of return to evaluate all investments that directly impact operations and amortizes the investment in plant and equipment using straight-line depreciation over 10 years on the difference between the initial investment and terminal disposal price.

Required:
1. Calculate the net present value of each proposal.
2. Which project should the bakery choose on the basis of the NPV calculations?
3. Mention which strategic factors must be considered by the managers when ranking the projects.





Transcribed Image Text:

Project: Increase Capacity Project: Upgrade to Serve New Markets Customer Service Proposed by Production manager Sales and marketing manager Rationale Assets are operating at full capacity and we are unable to attend to all the demand, The fleet of trucks and vans need to be upgraded with tracking devices and remote connections to flex therefore we need to expand our facilities to produce more kilograms. the planning of routes. The new software will allow the company to be paperless and respond faster to customers' requests. Investment $600,000 $345,000 Working capital $ 50,000 $150,000 Terminal disposal value $60,000 None Expected useful life 10 years 5 years Expected increase in operating income Expected savings in S400,000 $80,000 administrative costs None $40,000


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