Internal Rate of Return Method-Two Projects Munch N\' Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.45. The delivery truck operating expenses, excluding depreciation, are $1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is $18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-ye lives. The minimum rate of return is 13%. However, Munch N\' Crunch has funds to invest in only one of the projects Present Value of an Annuity of $1 at Compound Interest Year 10% 12% 15% 20% 6% 0.943 0.909 0.893 0.870 0.833 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.7913.605 3.353 2.991 4.917 4.3554.111 3.785 3.326 5.582 4.868 4.5644.1603.605 6.210 5.335 4.9684.4873.837 6.802 5.759 5.328 4.7724.031 7.360 6.145 5.650 5.019 4.192 2 9 10 a. Compute the internal rate of return for each investment. Use the above table of present value of a 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 lessthan the minimum rate of return requirement of 13% while the delivery truck rate of return was greater V than the minimum rate of return requirement of 13%. Therefore the recommendation is to invest in the delivery truck V
Cash Inflows from Delivery Truck per year
Extra Contribution Earned
(95000*0.45)
42750
Operating expenses
(1.35*24000)
-32400
Cash flow in a year
10350
Cash Inflows from Bagging Machine per year
cost saved by saving of Hours
(250*3*18)
13500
Cash flow in a year
13500
At internal rate of return the NPV is zero
Delivery truck
Npv at 10%
Yearly Return
10350
Annuity factor for 7 year at 10%
4.868
returns for 7 years discounted
50383.8
Cash Outflow at beginning
43056
Positive NPV
7327.8
Npv at 15%
Yearly Return
10350
Annuity factor for 7 year at 15%
4.16
returns for 7 years discounted
43056
Cash Outflow at beginning
43056
NPV
0
Internal rate of return for Delivery truck is 15%
Bagging Machine
Npv at 10%
Yearly Return
13500
Annuity factor for 7 year at 10%
4.868
returns for 7 years discounted
65718
Cash Outflow at beginning
61614
Positive NPV
4104
Npv at 12%
Yearly Return
13500
Annuity factor for 7 year at 12%
4.564
returns for 7 years discounted
61614
Cash Outflow at beginning
61614
NPV
0
Internal rate of return for Delivery truck is 12%
Delivery Truck Bagging Machine
Present Value Factor 4.16 4.564
Internal rate of Return 15% 12%
| Cash Inflows from Delivery Truck per year | | |
| | |
| Extra Contribution Earned | (95000*0.45) | 42750 |
| Operating expenses | (1.35*24000) | -32400 |
| Cash flow in a year | | 10350 |
| | |
| | |
| Cash Inflows from Bagging Machine per year | |
| cost saved by saving of Hours | (250*3*18) | 13500 |
| Cash flow in a year | | 13500 |
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