Cousin\'s Salted Snack Company is considering two possible investments: a delive
ID: 2483182 • 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 $25,466.60 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 $29,126.25. 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 four-year lives. The minimum rate of return is 19%. However, Cousin's has funds to invest in only one of the projects. Compute the internal rate of return for each investment. Use the above table of present value 9f 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. 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 .Explanation / Answer
b. The bagging machine rate of return was more than the minimum rate of return requirement of 19% while the delivery truck rate of return was less than the minimum rate of return requirement of 19%. Therefore the recommendation is to invest in the Bagging Machine.
Deliverry Truck Cost 25466.6 Bags delivered 44000 Cont. margin per bag 0.38 Total contribution Margin 16720 Operating cost of truck per year 7800 Savings per year 8920 Year Cash flow PV Factor Present Value 0 -25467 1 -25467 1 8920 0.84034 7495.8 2 8920 0.70616 6298.99 3 8920 0.59342 5293.27 4 8920 0.49867 4448.13 NPV -1930.4 Year Cash flow 0 -25467 1 8920 2 8920 3 8920 4 8920 IRR 15.00% Bagging Machine Cost 29126.3 Labor hours saved at 3 hours per day 750 Labor hour rate 15 Total Savings 11250 Year Cash flow PV Factor Present Value 0 -29126 1 -29126 1 11250 0.84034 9453.78 2 11250 0.70616 7944.35 3 11250 0.59342 6675.93 4 11250 0.49867 5610.02 NPV 557.837 Year Cash flow 0 -29126 1 11250 2 11250 3 11250 4 11250 IRR 19.99%