The Elberta Fruit Farm of Ontario has always hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, 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: Currently, the farm is paying an average of $190,000 per year to transient workers to pick the cherries. The cherry picker would cost $510,000. It would be depreciated using the straight-line method and it would have no salvage value at the end of its 10-year useful life. Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $92,000; insurance, $1,000; fuel, $9,000; and a maintenance contract, $12,000. Click here to view Exhibit 12B-1 and Exhibit 12B-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. 2a. Compute the simple rate of return expected from the cherry picker. 2b. Would the cherry picker be purchased if Elberta Fruit Farm’s required rate of return is 8%? 3a. Compute the payback period on the cherry picker. 3b. The Elberta Fruit Farm will not purchase equipment unless it has a payback period of nine years or less. Would the cherry picker be purchased? 4a. Compute the internal rate of return promised by the cherry picker. 4b. Based on this computation, does it appear that the simple rate of return is an accurate guide in investment decisions?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Can you please answer all parts of this question? I would hate to spend another question because this has 4 parts instead of 3.

Problem 12-24 (Algo) Simple Rate of Return; Payback Period; Internal Rate of Return [LO12-1, LO12-3, LO12-6]

The Elberta Fruit Farm of Ontario has always hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, 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:

Currently, the farm is paying an average of $190,000 per year to transient workers to pick the cherries.
The cherry picker would cost $510,000. It would be depreciated using the straight-line method and it would have no salvage value at the end of its 10-year useful life.
Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $92,000; insurance, $1,000; fuel, $9,000; and a maintenance contract, $12,000.

Click here to view Exhibit 12B-1 and Exhibit 12B-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.

2a. Compute the simple rate of return expected from the cherry picker.

2b. Would the cherry picker be purchased if Elberta Fruit Farm’s required rate of return is 8%?

3a. Compute the payback period on the cherry picker.

3b. The Elberta Fruit Farm will not purchase equipment unless it has a payback period of nine years or less. Would the cherry picker be purchased?

4a. Compute the internal rate of return promised by the cherry picker.

4b. Based on this computation, does it appear that the simple rate of return is an accurate guide in investment decisions?

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 5 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions