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ID: 2397458 • Letter: C
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could you please answer this question and put the steps :) Thankk you !!!
Internal Rate of Return Method-Two Projects Munch N' Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $44,229.12 and could be used to deliver an additional 38,000 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 13,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $39,960. 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 11%. However, Munch N' Crunch has funds to invest in only one of the projects Present Value of an Annuity of $1 at Compound Interest 6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 12% 0.893 1.690 2.402 3.037 3.605 1590 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 2090 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 Year 3 4 6 7 8 4.564 4.968 5.328 5.650 10Explanation / Answer
Cash Inflows from Delivery Truck per year
Extra Contribution Earned
(38000*0.38)
$ 14,440.00
Operating expenses
(0.52*13000)
$ (6,760.00)
Cash flow in a year
$ 7,680.00
Cash Inflows from Bagging Machine per year
cost saved by saving of Hours
(250*3*10)
$ 7,500.00
Cash flow in a year
$ 7,500.00
At internal rate of return the NPV is zero
Delivery truck
NPV at 10%
Yearly Return
$ 7680
Annuity factor for 9 year at 10%
5.759
returns for 7 years discounted
$ 44229.12
Cash Outflow at beginning
$ 44229.12
Positive NPV
$ 0
NPV at 15%
Yearly Return
$ 7680
Annuity factor for 9 year at 15%
4.772
returns for 9 years discounted
$ 36648.96
Cash Outflow at beginning
$ 43056
NPV
$-6407.04
Internal rate of return for Delivery truck is 10%
Bagging Machine
NPV at 10%
Yearly Return
$ 7500
Annuity factor for 9 year at 10%
5.759
returns for 9 years discounted
$ 43192.5
Cash Outflow at beginning
$ 39960
Positive NPV
$ 3232.5
NPV at 12%
Yearly Return
$ 7500
Annuity factor for 9 year at 12%
5.328
returns for 9 years discounted
$ 39960
Cash Outflow at beginning
$ 39960
NPV
$ 0
Internal rate of return for Delivery truck is 12%
Answer a
Delivery truck
Bagging machine
Present Value Factor
5.759
5.328
Internal rate of Return
10%
12%
Answer b
Bagging machine's internal rate of return is greater than required rate of return.
Delivery trucks Internal rate of return is lower than Minimum rate of return required.
Purchase of Bagging machine is Recommended.
Cash Inflows from Delivery Truck per year
Extra Contribution Earned
(38000*0.38)
$ 14,440.00
Operating expenses
(0.52*13000)
$ (6,760.00)
Cash flow in a year
$ 7,680.00
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