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 $25,961.88 and could be used to deliver an additional 42,000 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 14,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $31,590.00. 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 five-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 |
4.192 |
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.
|
Delivery Truck |
Bagging Machine |
| Present value factor |
|
|
| Internal rate of return |
% |
% |
b. The bagging machine rate of return was Select greater less Item 5 than the minimum rate of return requirement of 19% while the delivery truck rate of return was Select greater less Item 6 than the minimum rate of return requirement of 19%. Therefore the recommendation is to invest in the Selectbagging machinedelivery truckItem 7 .