Strahn Foods Inc. is considering two possible investments: a delivery truck or a bagging machine. The delivery

Question:

Strahn Foods Inc. is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $65,970 and could be used to deliver an additional 90,000 bags of taquitos chips per year. Each bag of chips can be sold for a contribution margin of $0.35. The delivery truck operating expenses, excluding depreciation, are $0.55 per mile for 24,000 miles per year.

The bagging machine would replace an old bagging machine, and its net investment cost would be $35,890. The new machine would require 2.5 fewer hours of direct labor per day. Direct labor is $20 per hour. There are 240 operating days in the year. Both the truck and the bagging machine are estimated to have five-year lives. The minimum rate of return is 14%. However, Strahn Foods has funds to invest in only one of the projects.

a. Compute the internal rate of return for each investment. Use the table of present values of an annuity of $1 in the chapter.

b. Provide a memo to management with a recommendation.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,...