nternal Rate.of Return Method-wo Projects Cousin\'s Salted Snack Company is cons

Question

nternal Rate.of Return Method-wo Projects Cousin's Salted Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $31,002.60 and could be used to deliver an additional 49,000 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 17,000 miles per year The bagging machine would replace an old bagging machine, and its net investment cost would be $34,166.25. 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 four-year lives. The minimum rate of return is 11%. However, Cousin's has funds to invest in only one of the projects Present Value of an Annuity of $1 at Compound Interest 10% 0.909 1.736 2.673 2.487 2.402 3.465 3.170 3.037 3.791 4.355 4.868 12% 0.893 1.690 15% 0.870 1.626 2.283 2.855 3.605 3.352 3.784 4.160 5.335 4.968 4.487 4.772 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 Year 6% 0.943 1.833 4.212 4.917 5.582 6.210 6.802 7.360 4.111 4.564 5.759 5.328 10 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 6.145 5.650 Delivery Truck Bagging Machine Present value factor Internal rate of return b The bagging machine rate of return was select than the minimum rate of return requirement of 11% while the delivery truck rate o return was requirement of 11%. Therefore the recommendation is to invest in the select select than the minimum rate o return

Explanation / Answer

Annual cash flows Delivery truck =(49000*0.38)-(17000*0.52)= 9780 Annual cash flows bagging machine=3*15*250= 11250 1 Delivery truck Bagging machine Present value factor 3.17 3.037 Internal rate of return 10% 12% 2 The bagging machine has more than required rate of return while delivery truck has less than required rate of return. Therefore the recommendation is to invest in Bagging machine

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