Cousin\'s Salted Snack Company is considering two possible investments: a delive
ID: 2464527 • 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 $39,987.52 and could be used to deliver an additional 48,000 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 16,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $76,522.50. 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 nine-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 ____________% _____________%
Explanation / Answer
Delivery Truck Initial Investment 39987.52 Cash inflow 18240 (48000*0.38) Less : operating expenses (16000*0.52) 8320 Net Cash flow 9920 PV Factor @ 20% for 9 years 4.031 PV of net cash flow = Net cash flow * PV Factor 39987.52 NPV = PV of net cash flow - Initial Investment = 39987.52 - 39987.52 = 0 IRR is where NPV is 0 , hence IRR for delivery truck = 20% Bagging Machine Initial Investment 76522.5 Saving of labor hr ( Cash Inflow) (250 *3*45) 11250 PV factor @ 6% for 9 years 6.802 PV of net cash flow = Net cash flow * PV Factor 76522.5 NPV = PV of net cash flow - Initial Investment = 76522.5 - 76522.5 = 0 IRR is where NPV is 0 , hence IRR for bagging machine = 6% Delivery Truck Bagging Machine Present Value Factor 4.031 6.802 IRR 20% 6%