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 2).
b. Provide a memo to management, with a recommendation.