Internal Rate of Return Method—Two Projects Munch N\' Crunch Snack Company is co

Question

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 $43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.45. The delivery truck operating expenses, excluding depreciation, are $1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is $18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 13%. However, Munch N' Crunch 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 than the minimum rate of return requirement of 13% while the delivery truck rate of return was than the minimum rate of return requirement of 13%. Therefore the recommendation is to invest in the .

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 3.353 2.991 6 4.917 4.355 4.111 3.785 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

Explanation / Answer

DELIVERY TRUCK

cash outflow= cost of truck=$43,056

cash inflow= revenue-depreciation-labour cost=95,000*0.45-1.35*24,000=10,350

cash outflow=net cash inflow / (1+r)n   where n=7years and rate= 13%

43056=10350/(1+r)7

1/(1+r)7=4.16

r=15%

BAGGAGING MACHINE

As no particular information abt total hours worked and

as there is no information regarding inflow of cash

irr = 13% (minimum) leading to negative npv

b. it is better to invest in delivery truck as it has positive npv

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