The management of Kelvin Industrial Bakery is analyzing two competing investment projects, and it 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 in the accompanying table. 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.
Requirement 1. Calculate the net present value (NPV) of each proposal.
First, calculate the net present value for the project that increases capacity to serve new markets. (Round to the nearest whole dollar. Us
What is the net present value?
Now, find the net present value for the project that upgrades customer service. (Round to the nearest whole dollar. Use parentheses or a
What is the net present value?
Requirement 2. Which project should the bakery choose on the basis of the NPV calculations?
Kelvin should immediately execute the project proposed by the
Requirement 3. Which strategic factors must be considered by the managers when ranking the projects? (Select all that apply.)
A. Managers must consider whether Kelvin's direct competitors have the same technology for planning routes.
B. Managers must evaluate the company's position in the industry.
C. Managers must consider whether customers want Kelvin to employ its new technology.
D. Managers must consider whether the proposal is an offensive strategy or a defensive strategy.
Proposed Investments
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
$595,000
Working capital
$54,000
Terminal disposal value
$58,000
Expected useful life
10 years
Expected increase in operating cash flow
$385,000 per year
Expected savings in administrative costs
None
Project: Upgrade Customer Service
Sales and marketing manager
The fleet of trucks and vans needs to be upgraded with tracking devices and remote connections to flex the planning of routes. The new software will allow the company to be paperless and respond faster to customers' requests.
$365,000
$154,000
None
5 years
$84,000 per year
$39,000 per year
Required
1. Calculate the net present value (NPV) of each proposal.
2. Which project should the bakery choose on the basis of the NPV calculations?
3. Which strategic factors must be considered by the managers when ranking the projects?