The Elberta Fruit Farm of Ontario has always hired transient workers to pick its
ID: 2793767 • Letter: T
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 $240,000 per year to transient workers to pick the cherries b. The cherry picker would cost $500,000, and it would have an estimated 6- 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 $95,000 c. Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $79,000; insurance, $3,000; fuel, $11,000; and a maintenance contract, $14,000 Required 1. Determine the annual savings in cash operating costs that would be realized if the cherry picker were purchased Less out-of-pocket costs to operate the cherry picker: Annual savings in cash operating costs 2a.Compute the simple rate of return expected from the cherry picker Simple Rate of Return Simple rate of return Simple rate of Choose Numerator: Choose Denominator: return 2b.Would the cherry picker be purchased if Elberta Fruit Farm's required rate of return is 11%? o Yes O NoExplanation / Answer
1.
Particulars
Amount($)
Amount($)
Savings in Payments made to Transeint for Picking Cherries
240,000
Less: Out of Pocket Costs
Cost of Operator
79,000
Insurance
3,000
Fuel
11,000
Maintanance Contract
14,000
107,000
Annual Savings in Cash Operating Costs
133,000
2.Simple Rate of Return Expected from Cherry Picker
Numerator Denominator Simple ROR
Annual Savings in Cash Operating Costs Cost of Cherry Picker
133,000$ 500,000$ 26.6%
2b.Yes, since the return as calculated above is more than 11%
3a.Numerator Denominator Simple ROR
Cost of Cherry Picker Annual Savings in Cash Operating Costs
500,000$ 133,000$ 3.75939
3b.Yes it will be purchased since the pay back period is less than 4 years
Particulars
Amount($)
Amount($)
Savings in Payments made to Transeint for Picking Cherries
240,000
Less: Out of Pocket Costs
Cost of Operator
79,000
Insurance
3,000
Fuel
11,000
Maintanance Contract
14,000
107,000
Annual Savings in Cash Operating Costs
133,000
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