Internal Rate of Return Method-Two Projects Munch N' Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $47,692.8 and could be used to deliver an additional 38,000 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 13,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $60,018.75. 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 eight-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 10 7.360 6.145 5.328 5.650 4.772 4.031 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. Present value factor Internal rate of return Delivery Truck X Bagging Machine X % X % than the minimum rate of return requirement of 9% while the delivery truck rate of return was less than the minimum rate of return requirement of 9%. Therefore the recommendation is to invest in the bagging machine b. The bagging machine rate of return was greater Feedback Check My Work a. For each investment, divide the amount to be invested by the annual net cash flows. In Exhibit 5, find the rate closest to this factor for eight periods. Determine the net cash flow for the delivery truck by adding the cash received (sales) and subtracting the cash paid (operating expenses). Determine the net cash flow for the bagging machine by calculating the direct labor savings (hours per day x days per year x hourly rate). b. Compare the actual rate of returns with the minimum rate required. Learning Objective 3.