Southwest Chip Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $39,918 and could be used to deliver an additional 36,250 bags of taquitos chips per year. Each bag of chips can be sold for a contribution margin of $0.40. The delivery truck operating expenses, excluding depreciation, are $0.35 per mile for 18,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $49,920. The new machine would require three fewer hours of direct labor per day. Direct labor is $16 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 11%. However, Southwest 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 values of an annuity of $1 in the chapter.
b. Provide a memo to management with a recommendation.