Snack Company Ltd is considering two possible investments:
A delivery truck or
A bagging machine
The delivery truck would cost $44,271 and could be used to deliver an additional 61,000 bags of pretzels each year. Each bag of pretzels can be sold for a contribution margin of $0.40. The delivery truck operating costs, excluding depreciation, are $0.70 per mile for 21,000 mile per year. The bagging truck would replace an old bagging machine, and its net investment cost would be $49,920. The new machine would require three fewer hours of direct labour per day. Direct labour is $16 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 13%. However Snack Company Ltd has funds to invest in only one of the projects.
Required:
Compute the net present value for each investment.
Provide a memo to the management with a recommendation.