Problem $14-24($Algo$)$ Simple Rate of Return; Payback Period; Internal Rate of Return $[$LO$14-1,$ LO$14-3,$ LO$14-6]$

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 $$210,000$ per year to transient workers to pick the cherries.

The cherry picker would cost $$600,000.$ 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, $$86,000$; insurance, $$5,000$; fuel, $$13,000$; and a maintenance contract, $$16,000.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ 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.

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

$2$b$.$ Would the cherry picker be purchased if Elberta Fruit Farm$$s required rate of return is $11\%?$

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

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

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

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