Château Beaune is a family-owned winery located in the Burgundy region of France
ID: 2402613 • Letter: C
Question
Château Beaune is a family-owned winery located in the Burgundy region of France, headed by Gerard Despinoy. The harvesting season in early fall is the busiest time of the year for the winery, and many part-time workers are hired to help pick and process grapes. Despinoy is investigating the purchase of a harvesting machine that would significantly reduce the amount of labour required in the picking process. The harvesting machine is built to straddle grapevines, which are laid out in low-lying rows. Two workers are carried on the machine just above ground level, one on each side of the vine. As the machine slowly crawls through the vineyard, the workers cut bunches of grapes from the vines, and the grapes fall into a hopper. The machine separates the grapes from the stems and other woody debris. The debris is then pulverized and spread behind the machine as a rich ground mulch. Despinoy has gathered the following information relating to the decision of whether to purchase the machine (the French currency is the euro, denoted by €):
The winery would save €190,000 per year in labour costs with the new harvesting machine. In addition, the company would no longer have to purchase and spread ground mulch—at an annual savings of €10,000.
The harvesting machine would cost €480,000. It would have an estimated 12-year useful life and zero salvage value. The winery uses straight-line depreciation.
Annual out-of-pocket costs associated with the harvesting machine would be insurance, €1,000; fuel, €9,000; and a maintenance contract, €12,000. In addition, two operators would be hired and trained for the machine, and they would be paid a total of €70,000 per year, including all benefits.
Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.
Château Beaune is a family-owned winery located in the Burgundy region of France, headed by Gerard Despinoy. The harvesting season in early fall is the busiest time of the year for the winery, and many part-time workers are hired to help pick and process grapes. Despinoy is investigating the purchase of a harvesting machine that would significantly reduce the amount of labour required in the picking process. The harvesting machine is built to straddle grapevines, which are laid out in low-lying rows. Two workers are carried on the machine just above ground level, one on each side of the vine. As the machine slowly crawls through the vineyard, the workers cut bunches of grapes from the vines, and the grapes fall into a hopper. The machine separates the grapes from the stems and other woody debris. The debris is then pulverized and spread behind the machine as a rich ground mulch. Despinoy has gathered the following information relating to the decision of whether to purchase the machine (the French currency is the euro, denoted by €):
a.The winery would save €190,000 per year in labour costs with the new harvesting machine. In addition, the company would no longer have to purchase and spread ground mulch—at an annual savings of €10,000.
b.The harvesting machine would cost €480,000. It would have an estimated 12-year useful life and zero salvage value. The winery uses straight-line depreciation.
c.Annual out-of-pocket costs associated with the harvesting machine would be insurance, €1,000; fuel, €9,000; and a maintenance contract, €12,000. In addition, two operators would be hired and trained for the machine, and they would be paid a total of €70,000 per year, including all benefits.
d. Despinoy feels that the investment in the harvesting machine should earn at least a 16% rate of return. Château Beaune is a family-owned winery located in the Burgundy region of France, headed by Gerard Despinoy. The harvesting season in early fall is the busiest time of the year for the winery, and many part time workers are hired to help pick and process grapes. Despinoy is investigating the purchase of a harvesting machine that would significantly reduce the amount of labour required in the picking process The harvesting machine is built to straddle grapevines, which are laid out in low-lying rows. Two workers are carried on the machine just above ground level, one on each side of the vine. As the machine slowly crawls through the vineyard, the workers cut bunches of grapes from the vines, and the grapes fall into a hopper The machine separates the grapes from the stems and other woody debris. The debris is then pulverized and spread behind the machine as a rich ground mulch. Despinoy has gathered the following information relating to the decision of whether to purchase the machine (the French currency is the euro, denoted by a. The winery would save 190,000 per year in labour costs with the new harvesting machine. In addition, the company would no longer have to purchase and spread ground mulch-at an annual savings of b. The harvesting machine would cost 480,000. It would have an estimated 12-year useful life and zero c. Annual out-of-pocket costs associated with the harvesting machine would be insurance, 1,000; fuel 10,000 salvage value. The winery uses straight-line depreciation 9,000; and a maintenance contract, 12,000. In addition, two operators would be hired and trained for the machine, and they would be paid a total of 70,000 per year, including all benefits d. Despinoy feels that the investment in the harvesting machine should earn at least a 16% rate of return. Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using Required: (lgnore income taxes.) 1. Determine the annual net savings in cash operating costs that would be realized if the harvesting machine were purchased nnual savings in cash operating costs 2. Compute the SRR expected from the harvesting machine. (Hint: This is a cost reduction project.) (Round your answer to 1 decimal place (i.e., 0.123 should be considered as 12.3%).) imple rate of return 3-a. Compute the payback period on the harvesting machine. (Round your answer to 1 decimal place.) ayback period earsExplanation / Answer
=200,000-92,000
=1,08,000
Savings in cost( INFLOW)
Savings in labour costs---------------1,90,000
Savings in ground mulch---------------10,000
TOTAL SAVINGS--------------------------2,00,000
ADDITIONAL COST( OUTFLOW)
Machine Cost------------------------ 4,80,000
Life of the Asset-----------------------12 years
Salvage Value of Asset---------------0
Depreciation= (4,80,000-0)/12 =40,000
Out of Pocket Expenses per annum( OUTFLOW)
Insurance-----------------------------1,000
Fuel------------------------------9,000
Maintenance--------------------------12,000
Cost of 2 Operators------------------70,000
TOTAL
2)SRR expected from the harvesting machine:
Simple Rate of Return=Annual Profit( less depreciation) /Original Investment
=1,08,000-40,000/4,80,000
=0.1417= 14.17 %
3 .a) Payback period on the harvesting machine
Payback period=Investment/income per period
= 4,80,000/1,08,000
=4.4 years
3.b) Since the payback period is less than 5 years i.e 4.44 years , the harvesting machine should be purchased.
4) IRR of the harvesting machine
IRR factor= Net Initial Investment/ Annual cash inflow
=4,80,000/1,08,000
=4.44
After computing the IRR factor the next step is to locate this discount factor in the present value of the annuity table. Since the useful life of the machine is 12 years , the factor would be in a 12 year period line or row.
At 15% factor PV of cash flows is 5,85,426.96
At 19 % factor PV of cash flows is 4,97,934.44
Therefore at 19.82 % i.e approx 20% PV of cash flows would be approx=4,80,000
4b.) NO: SRR is not an accurate guide in investment decisions.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.