Internal Rate of Return Method-Two Projects Strahn Foods Inc. is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $41,420.96 and could be used to deliver an additional 42,000 bags of taquitos chips per year. Each bag of chips can be sold for a contribution margin of $0.38. The delivery truck operating expenses, excluding depreciation, are $0.52 per mile for 14,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $45,348.75. 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 nine-year lives. The minimum rate of return is 19%. However, Strahn Foods 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 3.353 2.991 6 4.917 4.355 4.111 3.785 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
Internal Rate of Return Method-Two Projects Strahn Foods Inc. is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $41,420.96 and could be used to deliver an additional 42,000 bags of taquitos chips per year. Each bag of chips can be sold for a contribution margin of $0.38. The delivery truck operating expenses, excluding depreciation, are $0.52 per mile for 14,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $45,348.75. 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 nine-year lives. The minimum rate of return is 19%. However, Strahn Foods 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 3.353 2.991 6 4.917 4.355 4.111 3.785 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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
A1
Transcribed Image Text:a. Compute the internal rate of return for each investment. Use the above table of present value of an annuity of $1. Enter the present
value factor to three decimal places.
Present value factor
Internal rate of return
Delivery Truck
%
Bagging Machine
%
b. Which of the following should be included in a memo to management regarding the recommendation about the two projects?
Transcribed Image Text:Internal Rate of Return Method-Two Projects
Strahn Foods Inc. is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $41,420.96
and could be used to deliver an additional 42,000 bags of taquitos chips per year. Each bag of chips can be sold for a contribution margin of
$0.38. The delivery truck operating expenses, excluding depreciation, are $0.52 per mile for 14,000 miles per year. The bagging machine
would replace an old bagging machine, and its net investment cost would be $45,348.75. 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 nine-year lives. The minimum rate of return is 19%. However, Strahn Foods 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
2
1.833
1.736
3
2.673
2.487
4
3.465
3.170
5
4.212
3.791
6
4.917
4.355
7
5.582
4.868
8
6.210
5.335
9
6.802
5.759
10
7.360
6.145
0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
0.870
1.626
2.283
2.855
3.353
3.785
4.160
4.487
4.772
5.019
0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
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