The Elberta Fruit Farm of Ontario has always hired transient workers to pick its

Question

The Elberta Fruit Farm of Ontario has always hired transient workers to pick its annual cherry crop. Francie Wright, the farm manager, has just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a motorized device that shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. Ms. Wright has gathered the following information to decide whether a cherry picker would be a profitable investment for the Elberta Fruit Farm a. Currently, the farm is paying an average of $200,000 per year to transient workers to pick the cherries b. The cherry picker would cost $480,000, and it would have an estimated 8-year useful life. The farm uses straight-line depreciation on all assets and considers salvage value in computing depreciation deductions The estimated salvage value of the cherry picker is $120,000 c.Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $94,000; insurance, $3,000; fuel, $11,000; and a maintenance contract, $14,000 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables Required 1. Determine the annual savings in cash operating costs that would be realized if the cherry picker were purchased Less out-of-pocket costs to operate the cherry picker: Annual savings in cash operating costs 2a. Compute the simple rate of return expected from the cherry picker Simple Rate of Return Choose Numerator: Choose Denominator Simple rate of return = - Simple rate of return

Explanation / Answer

Solution.

.1.

2.

2b.

3. Calculation for paybackperiod.

= 6 + ( 2,000 / 33,000 ) = 6.06 Year.

3b.

Yes .

4. IRR

Current Cost                200,000.00 Cost of New Machine Depreciation                   45,000.00 Operator & assistant                   94,000.00 Insurance                     3,000.00 Fuel                   11,000.00 Maintenance Contract                   14,000.00 Total Cost                167,000.00 Annual Saving                   33,000.00

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