Case study: Healthy Vegetable Producers Healthy Vegetable Producers grow a variety of vegetables to sell to a major processing plant. John Brady, the new manager of Healthy Vegetable, is considering several changes in the business, including the purchase of a new harvesting machine that can dramatically reduce the number workers the firm employs at harvest. Perhaps you can help John by applying some of the decision tools discussed in this chapter to the decisions he faces. The cost of the new harvesting machine is $800,000, with an expected life of five years. The machine is very specialized, so it not expected to have any appreciable salvage value. However, there will be significant labor savings involved. Initially, the new equipment will require little maintenance and repair, but as it gets older, the cost of maintenance and repairs will go up sharply. Generally, the owners and management of Healthy Vegetable Producers feel that an 8 percent return should be expected from any new investment project before it can be undertaken. In addition, they would like a payback period of less than three years and a simple rate of return of at least 35 percent. Expected net cash flow before depreciation resulting from the investment and estimated depreciation expenses are shown in Table 13.9 Table 13.9 Estimated net profit and depreciation expense for new harvesting equipment Year 1 2 3 Expected Net Cashflow Before Depreciation* Depreciation $400,000 $200,000 500,000 200,000 500,000 200,000 400,000 200,000 300,000 200,000 4 5 * Net Profit here includes only cash inflows and outflows