Internal Rate of Return MethodTwo Projects

Munch N Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $36,036 and could be used to deliver an additional 52,000 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 18,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $35,662.5. 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 four-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	fill in the blank 1	fill in the blank 2
Internal rate of return	fill in the blank 3 %	fill in the blank 4 %

b. The bagging machine rate of return was

greaterlessgreater

than the minimum rate of return requirement of 9% while the delivery truck rate of return was

greaterlessless

than the minimum rate of return requirement of 9%. Therefore the recommendation is to invest in the

bagging machinedelivery truckbagging machine

.