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 $59,136.48 and could be used to er an additional 46,000 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 16,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $42,648.75. 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 9%. However, Cousin's has funds to invest in only one of the projects. Present Value of an Annuity of $1 at Compound Interest 20% 0.943 0.909 0.893 0.870 0.833 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.352 2.991 3.326 5.582 4.868 4.5644.160 3.605 6.210 5.335 4.968 4.487 3.837 6.802 5.759 5.3284.772 4.031 7.360 6.145 5.650 5.019 4.192 Year 690 10% 1296 15% 1.833 1.736 1.690 1.626 4.917 4.355 3.784 10

Explanation / Answer

Annual cash flows Delivery truck = (46000*0.58)-(16000*0.79)= $14040 Annual cash flows Bagging machine = 250*3*15= $11250 a Delivery truck Bagging machine Present value factor 4.212 3.791 Internal rate of return 6% 10% b The bagging machine rate of return was less than minimum rate of return while delivery truck rate of return was more than minimum rate. Therefore the recommendation is Bagging machine

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