Case study: Healthy Vegetable Producers Healthy Vegetable Producers grow a variety of vegetables to sell to a...

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Case study: Healthy Vegetable Producers
Healthy Vegetable Producers grow a variety of vegetables to sell toa major processing plant. John Brady, the new manager of HealthyVegetable, is considering several changes in the business,including the purchase of a new harvesting machine that candramatically reduce the number of workers the firm employs atharvest. Perhaps you can help John by applying some of the decisiontools discussed in this week’s material to the decision hefaces.
The cost of the new harvesting machine is $450,000, with anexpected life of five years. The machine is very specialized, so itis not expected to have any appreciable salvage value. However,there will be significant labor savings involved. Initially, thenew equipment will require little maintenance and repair, but, asit gets older the cost of maintenance, and repair will go upsharply. Generally, the owners and management of Healthy Vegetablefeel that a 12 percent return should be expected from any newinvestment project before it can be undertaken. In addition, theywould like a payback period of less than three years and anaccounting rate of return (ARR) of 25%. The business tax rate forthe company is 30%. Expected net returns before depreciation andtaxes from the investments and estimated depreciation expenses areshown in the following Table.
Year
Net profit before depreciation and taxes
Depreciation
1
$275,000
$90,000
2
250,000
90,000
3
225,000
90,000
4
175,000
90,000
5
160,000
90,000
Initially, beore any calculations, what is your generalreaction? Should the Vegetable Producers invest in the newequipment? (2 point)
What is the payback period for this investment (4 points)
What is the average rate of return (ARR) for this investment? (4points)
What is the net present value (NPV) of this investment, using12% minimum return
required by the owners? (4 points)
What is profitability index at 12%? (2 points)
What is the internal rate of return (IRR) for the investment?Calculate using interpolation
method. (5 points)
In the final analysis, do you believe this investment projectwould be good for Healthy
Vegetable? Why or why not? (4 points)

Answer & Explanation Solved by verified expert

3.6 Ratings (274 Votes)

Since there are multiple parts to the question I have answered the first five Part A The general reaction would be to invest in the equipment as it would help the company in reducing the labor cost that forms a significant portion of total costs incurred by the company in its vegetable production business Part B Step 1 Calculate Annual Cash Flow The value of annual cash flow is arrived as below Cash Flow Year 1 Year 2 Year 3 Year 4 Year 5 Net Profit before Depreciation and Taxes 275000 250000 225000 175000 160000 Less Depreciation 90000 90000 90000 90000 90000 Net Profit See Answer

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Case study: Healthy Vegetable ProducersHealthy Vegetable Producers grow a variety of vegetables to sell toa major processing plant. John Brady, the new manager of HealthyVegetable, is considering several changes in the business,including the purchase of a new harvesting machine that candramatically reduce the number of workers the firm employs atharvest. Perhaps you can help John by applying some of the decisiontools discussed in this week’s material to the decision hefaces.The cost of the new harvesting machine is $450,000, with anexpected life of five years. The machine is very specialized, so itis not expected to have any appreciable salvage value. However,there will be significant labor savings involved. Initially, thenew equipment will require little maintenance and repair, but, asit gets older the cost of maintenance, and repair will go upsharply. Generally, the owners and management of Healthy Vegetablefeel that a 12 percent return should be expected from any newinvestment project before it can be undertaken. In addition, theywould like a payback period of less than three years and anaccounting rate of return (ARR) of 25%. The business tax rate forthe company is 30%. Expected net returns before depreciation andtaxes from the investments and estimated depreciation expenses areshown in the following Table.YearNet profit before depreciation and taxesDepreciation1$275,000$90,0002250,00090,0003225,00090,0004175,00090,0005160,00090,000Initially, beore any calculations, what is your generalreaction? Should the Vegetable Producers invest in the newequipment? (2 point)What is the payback period for this investment (4 points)What is the average rate of return (ARR) for this investment? (4points)What is the net present value (NPV) of this investment, using12% minimum returnrequired by the owners? (4 points)What is profitability index at 12%? (2 points)What is the internal rate of return (IRR) for the investment?Calculate using interpolationmethod. (5 points)In the final analysis, do you believe this investment projectwould be good for HealthyVegetable? Why or why not? (4 points)

Year	Net profit before depreciation and taxes	Depreciation
1	$275,000	$90,000
2	250,000	90,000
3	225,000	90,000
4	175,000	90,000
5	160,000	90,000