Question

Internal Rate of Return Method—Two Projects

Munch N’ Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $32,767.98 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 $69,862.5. 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 eight-year lives. The minimum rate of return is 19%. However, Munch N’ Crunch 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	%	%

Answer 1

Answer:

Delivery Truck:
Initial Investment	32,767.98
Annual Cash inflow	8,540	(43,000*0.38)-(0.52*15,000)
Life in Years	8
Present value factor	3.84	(32767.98/8540)
Bagging Machine
Initial Investment	69,862.5
Annual Cash Inflow	11250	(3*15*250)
Life in Years	8
Present value factor	6.21	(69862.5/11250)

	Delivery Truck	Bagging Machine
Present value factor	3.84	6.21
Internal rate of return	20%	6%