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 $118,830.94 and could be used to deliver an additional 56,000 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 19,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $43,192.50. 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 nine-year lives. The minimum rate of return is 9%. However, Cousin's has funds to invest in only one of the projects. Present Value of an Annuity of $1 at Compound Interest 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 6.802 5.759 Internal rate of return % %

Explanation / Answer

Generally IRR is calculated by interpolition formula which is

To calculate IRR we calculate present value at 2 different discount rates and then calculate a discount rate at which NPV is zero using above formula.

However, in present situation present value annuity factor is already given at which NPV is zero.

Now for calculating rate, we need to look annuity table in year 9(as life of project is 9 years). In 9th year present value factor 6.802 comes under 6% and 5.759 comes under 10%. These are our IRR for respective projects.

While comparing IRR with minimum rate of return of 9%, we can conclude that we should go for bagging machine as it is yeilding more than our requirement.

IRR = Lower Discount Rate + [Lower Rate NPV / (Lower Rate NPV - Higher Rate NPV)] * (Higher Discount Rate - Lower Discount Rate)

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.