Cousin\'s Salted Snack Company is considering two possible investments: a delive
ID: 2456156 • Letter: C
Question
Cousin's Salted Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $52,705.10 and could be used to deliver an additional 47,000 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 16,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $37,710.00. 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 five-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.
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
Deliver Truck Cost $52705.10
Its Contribution Margin= 0.58 Per Bag
Operating Expenses= 16,000 Miles*0.79 Per Mile
= $12,640
Total Contribution Margin= 47000*.58
=27,260
Net Profit after Operating expense for Delivery truck = $27,260-$12,640
= $14,620
@IRR of 12% the NPV Will be NIl so IRR for Deliery truck is 12%
Bagging Machine will Save 3 Direct Labour Hours Per day.
Total Labour Cost saved per day= $15*3
=$45
Total Labour Cost saved in a year= $45*250 Days
=$11,250
Present Value Factor= Initital Investment/Yearly Cash flow
= 37,710/11,250
= 3.352
so IRR will be 15%
Considering above bagging Machine is preferred.
Delivery truck Bagging Machine Present Value Factor 3.605 3.352 Internal rate of return 12% 15%