Internal Rate of Return Method—Two Projects Cousin\'s Salted Snack Company is co
ID: 2749195 • Letter: I
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 $29,095.36 and could be used to deliver an additional 42,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.38. The delivery truck operating expenses, excluding depreciation, are $0.52 per mile for 14,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $33,648.75. The new machine would require three fewer hours of direct labor per day. Direct labor is $15 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have five-year lives. The minimum rate of return is 19%. However, Cousin's has funds to invest in only one of the projects.
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.
b. The bagging machine rate of return was SelectgreaterlessItem 5 than the minimum rate of return requirement of 19% while the delivery truck rate of return was SelectgreaterlessItem 6 than the minimum rate of return requirement of 19%. Therefore the recommendation is to invest in the Selectbagging machinedelivery truckItem 7 .
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 4.192Explanation / Answer
The bagging machine rate of return was tgreater than the minimum rate of return requirement of 19% while the delivery truck rate of return was less than the minimum rate of return requirement of 19%. Therefore the recommendation is to invest in the bagging machine..
Particulars Delivery Truck Bagging Machine Initial Cost -29095.36 -33648.75 Additional Bags 42000 Contribution Per Bag 0.38 Additional Contribution 15960 Truck Operating Expenses per Mile 0.52 Miles per Year 14000 Total Expenses 7280 Labour Cost: 3*250*15 11250Related Questions
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