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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Internal rate of return method—two projects

Strahn Foods Inc. is considering two possible investments: a delivery truck or a baggingmachine. The delivery truck would cost $65,970 and could be used to deliver an additional 90,000 bags of taquitos chips per year. Each hag 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 oldbagging machine, and its net investment cost would he $35,890. The new machine wouldrequire 2.5 fewer hours of direct labor per day. Direct labor is $20 per hour. There are240 operating days in the year. Both the truck and the bagging machine are estimated tohave 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 valuesof an annuity of $1 in the chapter.

b. Provide a memo to management with a recommendation.

To determine

(a)

Concept introduction:

Internal Rate of Return:

It is a rate of return at which the present values of cash flows computed by discounted from the annuity factor is equal to the initial investment i.e. cash outflow.

To compute:

The internal rate of return of each investment.

Explanation

        S F Inc.

    ParticularsDelivery TruckBagging Machine
    Net income each year  $18,300  $12,000
    Cost of Project  $65,970  $35,890
    Annuity factor for   5years  3.605( 65,970 18,300)  2

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