Internal Rate of Return Method—Two Projects Cousin\'s Salted Snack Company is co
ID: 2583708 • 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 $44,421.62 and could be used to deliver an additional 55,000 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 19,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $51,015.00. 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 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 .
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 $44,421.62 and could be used to deliver an additional 55,000 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 19,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $51,015.00. 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 19%. However, Cousin's has funds to invest in only one of the projects.
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 4.192a. 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.
Delivery Truck Bagging Machine Present value factor Internal rate of return % %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 .
Explanation / Answer
a) calculation of IRR
at IRR, NPV = 0
present value of cash inflow - present value of cash outflow =0
for bagging machine ,
cash inflow = saving in direct labour
= 3 * 10 *250 = $7500
present value of cash outflow = $51015
NPV = 7500 *PVAF(R%, 9yrs) - 51015 = 0
PVAF (R%, 9yrs) = 6.802
from,, pvaf table, R = 6%
for delivery truck,
cash inflow = contribution - operating expenses
= (.38 *55000) - (.52*19000)
= $ 11020
cash outflow = $44421.62
NPV =0
present value of cash inflow - present value of cash outflow = 0
11020 * PVAF (R%, 9 yrs) - 44421.62 = 0
PVAF(R%, 9yrs) = 4.031
from given table , R = 20 %
b) bagging machine rate of retun is less than minimum rate of return requirement of 19%.
while delivery truck rate of return is greater than 19%.
therefore , company should invest in delivery truck.
delivery truck bagging machine present value factor 4.031 6.802 internal rate of return 20% 6%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.