Internal Rate of Return Method—Two Projects Cousin\'s Salted Snack Company is co
ID: 2586167 • 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 $45,272.40 and could be used to deliver an additional 45,000 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 15,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $34,230.00. 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 seven-year lives. The minimum rate of return is 11%. However, Cousin's has funds to invest in only one of the projects.
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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.
%
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 4.192Explanation / Answer
Annual cash flows Delivery Truck =(45000*0.38)-(15000*0.52)= 9300 Annual cash flows Bagging Machine=3*10*250= 7500 Delivery Truck Bagging Machine Present value factor 4.868 4.564 Internal rate of return 10% 12%
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