Internal Rate of Return Method—Two Projects
Munch N’ Crunch Snack Company is considering two possibleinvestments: a delivery truck or a bagging machine. The deliverytruck would cost $48,601.8 and could be used to deliver anadditional 54,000 bags of pretzels per year. Each bag of pretzelscan be sold for a contribution margin of $0.38. The delivery truckoperating expenses, excluding depreciation, are $0.52 per mile for18,000 miles per year. The bagging machine would replace an oldbagging machine, and its net investment cost would be $46,248.75.The new machine would require three fewer hours of direct labor perday. Direct labor is $15 per hour. There are 250 operating days inthe year. Both the truck and the bagging machine are estimated tohave six-year lives. The minimum rate of return is 11%. However,Munch N’ Crunch has funds to invest in only one of theprojects.
| Present Value of an Annuity of $1 atCompound 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 eachinvestment. Use the above table of present value of an annuity of$1. If required, round your present value factor answers to threedecimal places and internal rate of return to the nearestpercent.
| Delivery Truck | Bagging Machine |
| Present value factor | | |
| Internal rate of return | % | % |
b. The bagging machine rate of return wasless than the minimum rate of return requirement of 11%while the delivery truck rate of return was greater thanthe minimum rate of return requirement of 11%. Therefore therecommendation is to invest in the delivery truck .
