Question

Munch N’ Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $53,252.28 and could be used to deliver an additional 47,000 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 16,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $54,765. 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 seven-year lives. The minimum rate of return is 9%. 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	%	%

Third time asking this question. Please read the question fully and answer it fully as well. Thank you.

Answer 1

Calculation of IRR
Delivery Truck
IRR is the discount rate on which NPV is zero. To calculate this, we have to took two Random Discount Rate if required.

Period	Initial Cost	Cash Inflow	Cash Outflows	Net Cash flows	P.V.F @ 6%	N.P.V @ 6%
0	-53252.28			-53252.28	1.000	-53,252.28
1-7		17860.00	-8320.00	9540.00	5.582	53,252.28
					NPV	-

NPV is zero at 6% Rate of Return, So IRR is 6%

Bagging Machine
Period	Initial Cost	Cost Savings	Net Cash flows	P.V.A.F @ 6%	N.P.V @ 6%	P.V.A.F @ 10%	N.P.V @ 10%
0	-54765		-54765	1.000	-54,765	1.000	-54,765
1-7		11,250	11250	5.582	62,798	4.868	54,765
				NPV	8,033	NPV	-
NPV is zero at 10% Rate of Return, So IRR is 10%

	Delivery Truck	Bagging Machine
Present Value Factor	5.582	4.868
IRR	6%	10%