close solutoin list

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 $43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.45. The delivery truck operating expenses, excluding depreciation, are $1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is $18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 13%. However, Munch N’ Crunch has funds to invest in only one of the projects. a. Compute the internal rate of return for each investment. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5). b. Provide a recommendation to management in a memo.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 26, Problem 26.18EX
Textbook Problem

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 $43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.45. The delivery truck operating expenses, excluding depreciation, are $1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is $18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 13%. However, Munch N’ Crunch has funds to invest in only one of the projects.

  1. a. Compute the internal rate of return for each investment. Use the present value of an annuity of $1 table appearing in this chapter (Exhibit 5).
  2. b. Provide a recommendation to management in a memo.

Expert Solution

a.

To determine

Internal rate of return method:

Internal rate of return method is one of the capital investment method which determines the rate of return wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method also called as the time-adjusted rate of return method, and it used to evaluate the different proposal’s expected rate of return.

To determine: The internal rate of return for the given project

Explanation of Solution

Delivery truck

The internal rate of return for the delivery truck is as follows:

Present value factor for an annuity of $1}=Amount to be investedEqual annual net cash flows (3)=$43,056$10,350=4.16

Working note:

1. Calculate the annual operating income:

Operating income=No. of additional bags×Margin rate per bag=95,000 bags×$0.45=$42,750 (1)

2. Calculate the annual operating expense:

Operating expense=No. of mile per year×Rate per mile=24,000 miles×$1.35=$32,400 (2)

3. Calculate the annual net cash flows:

Annual net cash flow=Operating income (1)Operating expense (2)=$42,750$32,400=$10,350 (3)

Locate the number of years (7 years) of expected useful life of the investment in the year column, and find the present value factor (4

Expert Solution

b.

To determine

To analysis: The investment in both project, and recommend the management by of creating memo.

Want to see this answer and more?

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

See solution

Chapter 26 Solutions

Accounting
Show all chapter solutions
Ch. 26 - What are the major advantages of leasing a fixed...Ch. 26 - Give an example of a qualitative factor that...Ch. 26 - How are investments in sustainability justified?Ch. 26 - Average rate of return Determine the average rate...Ch. 26 - Average rate of return Determine the average rate...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Net present value A project has estimated annual...Ch. 26 - Net present value A project has estimated annual...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Net present valueunequal lives Project A requires...Ch. 26 - Net present valueunequal lives Project 1 requires...Ch. 26 - Average rate of return The following data are...Ch. 26 - Average rate of returncost savings Midwest...Ch. 26 - Average rate of returnnew product Micro Tek Inc....Ch. 26 - Calculate cash flows Natures Way Inc. is planning...Ch. 26 - Cash payback period for a service company Prime...Ch. 26 - Cash payback method Lily Products Company is...Ch. 26 - Net present value method The following data are...Ch. 26 - Net present value method for a service company AM...Ch. 26 - Net present value methodannuity for a service...Ch. 26 - Net present value methodannuity Briggs Excavation...Ch. 26 - Net present value method for a service company...Ch. 26 - Present value index Dip N Dunk Doughnuts has...Ch. 26 - Net present value method and present value index...Ch. 26 - Average rate of return, cash payback period, net...Ch. 26 - Cash payback period, net present value analysis,...Ch. 26 - Internal rate of return method The internal rate...Ch. 26 - Internal rate of return method for a service...Ch. 26 - Internal rate of return methodtwo projects Munch N...Ch. 26 - Net present value method and internal rate of...Ch. 26 - Identify error in capital investment analysis...Ch. 26 - Net present valueunequal lives Bunker Hill Mining...Ch. 26 - Net present valueunequal lives Daisys Creamery...Ch. 26 - Sustainable energy capital investment analysis...Ch. 26 - Sustainable product capital investment analysis...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Cash payback period, net present value method, and...Ch. 26 - Net present value method, present value index, and...Ch. 26 - Net present value method, internal rate of return...Ch. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Cash payback period, net present value method, and...Ch. 26 - Net present value method, present value index, and...Ch. 26 - Net present value method, internal rate of return...Ch. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Ethics in Action Danielle Hastings was recently...Ch. 26 - Communication Global Electronics Inc. invested...Ch. 26 - Personal investment analysis for a service company...Ch. 26 - Qualitative issues in investment analysis The...Ch. 26 - Net present value method for a service company...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
NONCONSTANT GROWTH Milts Cosmetics Co.s stock price is 58.88, and it recently paid a 2.00 dividend. This divide...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Explain why an economys income must equal its expenditure.

Principles of Macroeconomics (MindTap Course List)

Define internal control.

Survey of Accounting (Accounting I)