Château Beaune is a family-owned winery located in the Burgundyregion of France, headed by Gerard Despinoy. The harvesting seasonin early fall is the busiest time of the year for the winery, andmany part-time workers are hired to help pick and process grapes.Despinoy is investigating the purchase of a harvesting machine thatwould significantly reduce the amount of labour required in thepicking process. The harvesting machine is built to straddlegrapevines, which are laid out in low-lying rows. Two workers arecarried on the machine just above ground level, one on each side ofthe vine. As the machine slowly crawls through the vineyard, theworkers cut bunches of grapes from the vines, and the grapes fallinto a hopper. The machine separates the grapes from the stems andother woody debris. The debris is then pulverized and spread behindthe machine as a rich ground mulch. Despinoy has gathered thefollowing information relating to the decision of whether topurchase the machine (the French currency is the euro, denoted by€):
a.	The winery would save €190,000 per year in labour costs with thenew harvesting machine. In addition, the company would no longerhave to purchase and spread ground mulch—at an annual savings of€10,000.
b.	The harvesting machine would cost €480,000. It would have anestimated 12-year useful life and zero salvage value. The wineryuses straight-line depreciation.
c.	Annual out-of-pocket costs associated with the harvestingmachine would be insurance, €1,000; fuel, €9,000; and a maintenancecontract, €12,000. In addition, two operators would be hired andtrained for the machine, and they would be paid a total of €70,000per year, including all benefits.
d.	Despinoy feels that the investment in the harvesting machineshould earn at least a 16% rate of return.

  

Click here to view Exhibit 10-1 and Exhibit 10-2, to determinethe appropriate discount factor(s) using tables.

   

Required:
(Ignore income taxes.)
1.	Determine the annual net savings in cash operating costs thatwould be realized if the harvesting machine were purchased.

       

2.	Compute the SRR expected from the harvesting machine.(Hint: This is a cost reduction project.) (Roundyour answer to 1 decimal place (i.e., 0.123 should be considered as12.3%).)

     

3-a.	Compute the payback period on the harvesting machine.(Round your answer to 1 decimal place.)

      

         

3-b.	Despinoy will not purchase equipment unless it has a paybackperiod of five years or less. Under this criterion, should theharvesting machine be purchased?
	Yes No

4-a.	Compute (to the nearest whole percent) the IRR promised by theharvesting machine. (Round discount factor(s) to 3 decimalplace and final answer to the nearest whole number (i.e., 0.123should be considered as 12%).)

         

4-b.	On the basis of this computation, does it appear that the SRR isan accurate guide in investment decisions?
	Yes No