Defensive and offensive strategies in capital budgeting. (CMA, adapted) The manage- ment 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 amortization over 10 years on the difference between the initial investment and terminal dis- posal 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.LO1

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Proposed by Rationale Project: Increase Capacity to Serve New Markets Production manager Assets are operating at full capacity and we are unable to attend to all the demand, therefore we need to expand our facilities to produce more kilograms. Investment Working capital Terminal disposal value Expected useful life Expected increase in $600,000 -$ 50,000 $60,000 10 years operating income Expected savings in administrative costs $400,000 None Project: Upgrade Customer Service Sales and marketing manager The fleet of trucks and vans need to be upgraded with tracking devices and remote connexions to flex the planning of routes. The new software will allow the company to be paperless and respond faster to customers' requests. $345,000 $150,000 None 5 years $80,000 $40,000