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Compute internal rate of return for each investment

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Reference no: EM132707000

Problem - 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 $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.

Required -

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.

Reference no: EM132707000

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