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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 .