Cousin\'s Salted Snack Company is considering two possible investments: a delive
ID: 2576873 • 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 $35,970.48 and could be used to deliver an additional 43,000 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 $28,432.5. 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 five-year lives. The minimum rate of return is 9%. 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
Net annual cash flows Delivery Truck = (43000*0.38)-(15000*0.52)= 8540 Net annual cash flows Bagging Machine = (3*10*250)= 7500 a Present value factor = Investment/Net annual cash flows Delivery Truck Bagging Machine Present value factor 4.212 3.791 Internal rate of return 6% 10%