The internal rate of return method is used by Merit Construction Co. in analyzing a capital expenditure proposal that involves an investment of

The internal rate of return method is used by Merit Construction Co. in analyzing a capital expenditure proposal that involves an investment of $82,220 and annual net cash flows of $20,000 for each of the six years of its useful life.

a. Determine a present value factor for an annuity of $1, which can be used in determining the internal rate of return.

b. Using the factor determined in part (a) and the present value of an annuity of $1 table appearing in this chapter (Exhibit 2), determine the internal rate of return for the proposal.

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Munch N’ Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine.

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.

Buckeye Healthcare Corp. is proposing to spend $186,725 on an eight-year project that has estimated net cash flows of $35,000 for each of the eight years.

Buckeye Healthcare Corp. is proposing to spend $186,725 on an eight-year project that has estimated net cash flows of $35,000 for each of the eight years.

a. Compute the net present value, using a rate of return of 12%. Use the present value of an annuity of $1 table in the chapter (Exhibit 2).

b. Based on the analysis prepared in part (a), is the rate of return (1) more than 12%, (2) 12%, or (3) less than 12%? Explain.

c. Determine the internal rate of return by computing a present value factor for an annuity of $1 and using the present value of an annuity of $1 table presented.

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Daisy’s Creamery Inc. is considering one of two investment options. Option 1 is a $75,000 investment in new blending equipment that is expected to produce equal annual cash flows of

Daisy’s Creamery Inc. is considering one of two investment options. Option 1 is a $75,000 investment in new blending equipment that is expected to produce equal annual cash flows of $19,000 for each of seven years. Option 2 is a $90,000 investment in a new computer system that is expected to produce equal annual cash flows of $27,000 for each of five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $15,000. The computer system has no expected residual value at the end of the fifth year.

Assume there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects. Assume a minimum rate of return of 10%. Round the present value index to two decimal places.

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