The Elberta Fruit Farm of Ontario always has hired transientworkers to pick its annual cherry crop. Janessa Wright, the farmmanager, just received information on a cherry picking machine thatis being purchased by many fruit farms. The machine is a motorizeddevice that shakes the cherry tree, causing the cherries to fallonto plastic tarps that funnel the cherries into bins. Ms. Wrighthas gathered the following information to decide whether a cherrypicker would be a profitable investment for the Elberta FruitFarm:
- Currently, the farm is paying an average of $230,000 per yearto transient workers to pick the cherries.
- The cherry picker would cost $620,000. It would be depreciatedusing the straight-line method and it would have no salvage valueat the end of its 8-year useful life.
- Annual out-of-pocket costs associated with the cherry pickerwould be: cost of an operator and an assistant, $91,000; insurance,$5,000; fuel, $13,000; and a maintenance contract, $16,000.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor using tables.
Required:
1. Determine the annual savings in cash operating costs thatwould be realized if the cherry picker were purchased.
2a. Compute the simple rate of return expected from the cherrypicker.
2b. Would the cherry picker be purchased if Elberta Fruit Farm’srequired rate of return is 11%?
3a. Compute the payback period on the cherry picker.
3b. The Elberta Fruit Farm will not purchase equipment unless ithas a payback period of six years or less. Would the cherry pickerbe purchased?
4a. Compute the internal rate of return promised by the cherrypicker.
4b. Based on this computation, does it appear that the simplerate of return is an accurate guide in investment decisions?
