Internal Rate of Return Method-Two Projects
Response to the following problem:
Cousin's Salted Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $37,107.20 and could be used to deliver an additional 44,000 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 $27,037.50. 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 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 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 _______ than the minimum rate of return requirement of 19% while the delivery truck rate of return was _______ than the minimum rate of return requirement of 19%. Therefore the recommendation is to invest in the________.