Internal Rate of Return Method—Two Projects Cousin\'s Salted Snack Company is co

Question

Internal Rate of Return Method—Two Projects Cousin's Salted Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $49,356.90 and could be used to deliver an additional 50,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.58. The delivery truck operating expenses, excluding depreciation, are $0.79 per mile for 17,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $22,777.50. The new machine would require three fewer hours of direct labor per day. Direct labor is $10 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have four-year lives. The minimum rate of return is 11%. However, Cousin's has funds to invest in only one of the projects. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 a. Compute the internal rate of return for each investment. Use the above table of present value of an annuity of $1. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent. Delivery Truck Bagging Machine Present value factor Internal rate of return % % b. The bagging machine rate of return was than the minimum rate of return requirement of 11% while the delivery truck rate of return was than the minimum rate of return requirement of 11%. Therefore the recommendation is to invest in the .

Explanation / Answer

Annual cash flows delivery truck=(50000*0.58)-(17000*0.79)= 15570 Annual cash flows bagging machine =3*10*250= 7500 a Delivery Truck Bagging Machine Present value factor 3.17 3.037 Internal rate of return 10% 12% b The bagging machine rate of return was more than the minimum rate of return requirement of 11% while the delivery truck rate of return was less than the minimum rate of return requirement of 11%. Therefore the recommendation is to invest in the Bagging machine

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