Question

Munch N’ Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $32,207.2 and could be used to deliver an additional 50,000 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 17,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $22,777.5. 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 four-year lives. The minimum rate of return is 11%. 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	%	%

b. The bagging machine rate of return was than the minimum rate of return requirement of 11% while the delivery truck rate of return was than the minimum rate of return requirement of 11%. Therefore the recommendation is to invest in the .

Answer 1

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Calculation of Net Cash Inflow:	Delivery Truck
Additional Delivery of		50000	Bags
Contribution Margin of per bag		0.38
Total Contribution Margin		19000
Less: Cash Operating Expense	0.52*17000	8840
Net Incremental Cash inflow		10160
	Bagging Machine
Cash Saving by Hours		7500
(3Hour*10 Per Hour*250 Days)
Net Incremental Cash inflow		7500
	6%	10%	12%	15%	20%
Present Value of an Annuity of $1 at Compound Interest 4Years	3.465	3.17	3.037	2.855	2.589
Delivery Truck:
Cash Inflow	10160	10160	10160	10160	10160
Present Value of Cash Flow (PVAF*Cash Flow)	35204	32207	30856	29007	26304
Bagging Machine:
Cash Inflow	7500	7500	7500	7500	7500
Present Value of Cash Flow (PVAF*Cash Flow)	25988	23775	22778	21413	19418
Part A (IRR is point where PV of cash inflow is equal to Outlfow)
Delivery Truck	Delivery Truck	Bagging Machine
Present value factor	3.17	3.037
Internal rate of return	10%	12%
Part B
More Than
Less Than
Recommendation is to invest in the Baggin Machine