#8 Internal Rate of Return Method—Two Projects Cousin\'s Salted Snack Company is
ID: 2593433 • Letter: #
Question
#8
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 $65,800.80 and could be used to deliver an additional 39,000 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 13,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $53,685.00. 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 nine-year lives. The minimum rate of return is 14%. 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
than the minimum rate of return requirement of 14% while the delivery truck rate of return was than the minimum rate of return requirement of 14%. 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 3.352 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
a) Internal rate of return is the rate at which NPV is zero (i.e. PV of cash inflows is equal to PV of cash outflows)
Statement showing PV of cash inflows and outflows from the two projects (Amount in $)
b) The bagging machine rate of return was higher than the minimum rate of return requirement of 14% while the delivery truck rate of return was lower than the minimum rate of return requirement of 14%. Therefore the recommendation is to invest in Bagging Machine.
Particulars Delivery Truck Bagging Machine Increased contribution margin (39,000*0.58) = 22,620 Less: Operating expenses (13,000*0.79) = (10,270) Saving in Labor cost (3*$15*250) = 11,250 Cash inflow per year (a) 12,350 11,250 Cash outflow (b) 65,800.80 53,685.00 Required PVAF (b/a) 5.328 4.772 Relevant IRR from the tables given in the question for 9 years 12% 15%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.