The Elberta Fruit Farm of Ontario always has 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 $290,000 per year to transient workers to pick the cherries.
- The cherry picker would cost $680,000. 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, $84,000; insurance, $3,000; fuel, $11,000; and a maintenance contract, $14,000.
Click here to view Exhibit 7B-1 and Exhibit 7B-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. (Round your percentage answer to 2 decimal places.)
2b. Would the cherry picker be purchased if Elberta Fruit Farms required rate of return is 20%?
3a. Compute the payback period on the cherry picker. (Round your answer to 2 decimal places.)
3b. The Elberta Fruit Farm will not purchase equipment unless it has a payback period of four years or less. Would the cherry picker be purchased?
4a. Compute the internal rate of return promised by the cherry picker. (Round your answer to the nearest whole percent.)
4b. Based on this computation, does it appear that the simple rate of return is an accurate guide in investment decisions?
EXHIBIT 78-2 Present Value of an Annuity of $1 in Arrears EXHIBIT 78-1 Present Value of St 6 8 9 Penods 4% 5% 6% 7% 8% 9% 10% 15% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 1 0.962 0.952 0943 0935 0926 0917 0909 0.901 0893 0.885 08770870 0.862 0855 08470840 0833 0826 0820 0813 0806 0800 2 0925 0907 0890 0873 08570842 0826 0812 0797 0783 0769 0756 0743 0731 0718 0706 0.694 0683 0672 0661 0650 0640 3 0889 0.864 0840 0816 0794 0m 0.751 0.731 0712 0.693 0675 0.658 0.641 0624 0.609 0593 0.579 0.564 0.551 0.537 0.524 0512 4 0855 0823 0792 0763 0735 0708 0683 0659 0636 061305920572 0.552 0534 0516 0499 0482 0.467 0451 0437 0423 0410 5 0822 0784 0747 0713 0681 0650 0621 0593 0567 0543 0519 0497 0476 0456 0437 0419 0402 0386 0370 0355 0341 0328 0790 0.746 0.705 0666 0630 0596 0564 0.535 0507 0.480 0456 0432 0.410 0390 0370 0352 0335 0.319 0.303 0.289 0275 0262 7 0,760 0711 0665 0623 0583 0547 05130482 0452 0425 0400 0376 0354 0.333 034 0296 0279 0.263 0249 0235 0222 0210 8 0731 06770627 0582 0540 0502 04670434 0404 0376 0351 0327 0.305 0285 0.266 0249 0233 0.218 0204 0191 0179 0168 0703 0645 0592 0544 0500 0460 0424 0.391 0361 0333 0308 0284 0263 0243 0225 0209 0194 0.180 0167 0155 0144 0134 10 0676 0614 0558 0508 0463 0422 0386 0352 0322 0295 0270 0207 0227 0208 0191 0176 01620149 0137 0126 0116 0107 11 0650 0585 0527 0475 0429 0388 0350 0317 0287 0261 0237 0215 0195 0178 0962 0948 0135 0123 0112 0903 0094 0086 12 0625 0557 0497 0.444 0397 0356 0319 0286 0257 0231 0208 0587 0.168 0152 0137 0124 01120102 0.092 0083 0076 0.069 13 0.601 0530 0.469 0415 0368 0326 0290 0258 0229 0.204 0182 0163 0.145 0.130 0.116 0104 0.093 0.084 0.075 0.068 0061 0055 14 0577 05050442 0388 0340 0299 0263 0232 0205 0181 0160 0541 01250111 0099 0.088 0078 0.069 0062 0055 0049 0044 15 0555 0 481 0417 0362 0315 0275 0239 0209 0183 0960 0140 01230108 0095 0084 0074 0065 0057 0051 0045 0040 0035 16 0534 0.458 0394 0339 0292 0252 0218 0988 01630541 0123 09070093 0081 0071 0062 0054 0047 00420036 0.032 0028 17 0513 0436 0371 0317 0270 0231 0198 01700146 0125 0908 0093 0.080 0069 0060 0052 0.045 0039 0.034 0030 0026 0.023 18 0494 0416 0350 0296 0250 0212 01800153 0130 0111 0095 0081 0069 0059 0051 0044 0038 0032 0.028 0024 0021 0018 19 0475 0.396 0331 0277 0232 0194 0164 0138 0116 0098 0.083 007000600051 0043 0037 0031 0.027 0023 0020 0017 0014 20 0456 0371 0312 0258 0215 0178 0149 0124 0904 0087 0073 0.061 0.051 0043 0037 0031 0,026 0022 0.019 0016 0.01 0012 21 0439 0.359 0294 0242 0199086401350112 0,093 0077 0.054 0053 004 0037 0031 0026 0022 0018 0015 0013 001 0009 22 0.422 0.342 0278 0226 0184 0150 0123 0.101 0083 0068 0.056 0046 0038 0032 0.026 0022 0.018 0015 0.03 0011 0009 0.007 23 0.406 0326 0262 0211 0170 0138 012 0.091 0.074 0.060 0.049 0040 0.033 0.027 con 0018 0015 0012 0010 0009 0.0070006 24 0390 0.30 0.247 0197 0158 0126 0102 0.082 0066 0.053 0043 0035 0.028 0023 0019 0.015 0013 0.00 0.008 0.007 0.006 0005 25 0375 0295 0233 0184 0146 0116 0092 0074 0059 0047 0038 0030 0.024 0020 0096 0013 0010 0009 0.007 0006 0.005 0004 26 0361 0281 0220 0172 01350106 0084 0.066 0053 0042 0033 0026 0.021 0017 0014 001 0.009 0007 0.006 0005 0.004 0003 27 0347 0268 0207 0161 0125 0.098 0076 0.060 0047 0.037 0029 0023 0.018 001 0011 0009 0007 0006 0.005 0004 0003 0.002 28 0333 0255 0196 0150 0116 0090 0069 0.054 0042 0033 0.026 0020 0016 0012 0010 0008 0.006 0005 0.004 0003 0.0020002 29 0321 0243 0185 0141 0907 0.082 0063 0,048 0,037 0029 0022 0.01 0.014 0.01 0008 0006 0.005 0.004 0003 0002 0.002 0002 30 0308 0231 0174 0131 0099 0075 0057 0044 0033 0.026 00200015 0.012 0009 0007 0.005 0004 0.003 0003 0002 0002 0001 40 0208 0142 0097 0.067 0046 0.032 0022 0015 001 0008 0.005 0.004 0.003 0002 0.001 0.001 0001 0000 0000 0000 0000 0000 Periods 4 5% 7% 8% 9% 30% 12 38 10% 15% 16% 17% 183 19% 20% 21% 22% 23% 24% 25% % 1 0962 0.952 0943 0935 0926 0917 0909 0.901 0893 0885 0877 08700862 0855 0817 0840 0833 0826 0820 08130806 0800 2 1886 1859 1833 1808 1783 1759 1736 1713 1690 1668 1647 1626 1605 1585 1566 1547 1528 1509 1492 1474 1457 1440 3 2775 2.723 2673 2624 2577 2531 2487 2444 2402 2361 2322 2283 2246 2210 2174 2140 2106 2074 2042 2011 1981 1952 4 3630 3546 34653387 332 3240 3170 3102 3037 2974 2914 2855 2.798 2743 2690 2639 2589 2540 2494 2448 2404 2362 5 4.452 4329 4212 4100 3993 3.890 3791 3.696 3.605 3517 3.433 3352 3274 3199 3127 3.058 2991 2926 2864 2803 2745 2689 6 5242 5076 49174767 4623 4486 4355 4231 4111 3998 3889 3784 3685 3589 3498 3410 3326 3245 3167 3092 3020 2951 7 60025786 5582 53895206 5.033 4868 4712 4564 4423 4288 4160 4039 3922 3812 37063605 3.508 3.416 3327 3242 3161 8 6733 6.463 6210 597157475535 5335 5146 4968 4799 4639 4487 4344 4207 4078 3954 3837 3.726 3619 3518 3421 3329 9 7435 7108 6802 6515 6247 5995 5759 5537 5328 51324946 4772 4607 4451 4303 4163 4031 3905 3.786 3673 3566 3463 10 8111 7722 7360 7024 6710 6.418 6145 5889 5650 5426 5216 5019 4833 4659 4494 4339 492 4054 3923 3799 3682 3571 11 8760 83067887 7499739 6805 6495 6.207 5938 5687 5453 5234 5029 48364656 4486 4327 417 4035 3902 3776 3656 12 9385 8863 8384 7943 7536 7161 6.814 6492 6194 5918 5660 5421 5197 4988 4793 4611 4439 4278 4127 3985 3851 3725 13 9 986 9394 8853 8358 7904 74877303 6.750 6424 6122 5842 5583 5342 5118 4910 4715 4533 4362 4203 4053 3912 3780 14 10563 989992958745 8244 7786735769826628 6302 6002 5724 5468 5229 5008 4802 4611 4432 4265 4908 3962 3824 15 11.118 90.380 9712 103809712 9108 9108 8559 8061 76067191 6811 6462 6.142 5.847 5.575 5324 5092 4876 4675 4.489 4315 4153 4001 3.859 55 11652 10838 10.106 9447 8851 83137824 7379 6974 6604 6265 5954 5668 5405 51624938 4730 4536 4357 4589 4033 3887 17 12.166 11274 10477 9763 922 8544 8022 7549 720 6729 6373 6047 5749 5475 5222 4990 4775 4576 4391 4219 4059 3910 18 12659 11690 10828 10059 9372 8756 8201 7702 7250 6840 6.467 6128 5818 5534 5 273 5033 48124608 4419 4243 4080 3928 19 13.134 12085 11158 10.336 9604 8950 8365 7839 7366 6938 6550 6198 5877 5584 5 316 5070 4843 4635 4442 4263 4097 3942 20 13.590 2.462 11470 10.594 9818 9129 8514 7963 7469 7025 6623 6259 5929 5628 5353 5101 4870 4657 4460 4279 41103954 21 14.029 2821 11764 10.836 10.017 9292 8649 8075 7562 7102 6687 6312 5973 5665 5384 5127 4891 4675 4.476 4292 4121 3.963 4476 22 14451 3163 12042 11061 10201 9442 872 8176 7645 7170 6743 6,359 6011 5696 5410 519 4909 4690 4488 4302 4130 3.970 23 14857 3.489 12303 11272 10371 9580 8883 8266 7718 7230 6792 6399 6044 57235432 5157 4925 4703 4499 4311 4137 3976 24 15 247 3799 12550 11.469 10529 97078985 8348 7784 7283 6835 6434 6073 5746 5451 5182 4937 4713 4507 4318 41433981 25 15.622 M.094 12783 11654 10.675 9823 9077 8.422 7843 73306873 6.464 6.097 5766 5467 51954948 4721 454 4323 447 3.985 26 15.983 14375 13.003 11826108109929 9361 8488 7896 7372 6906 6 491 6118 5783 5480 5 206 49564728 4520 4328 4151 3988 27 16330 M4643 13211 11987 10935 10027 9237 8548 7943 7409 6935 6514 636 5798 5492 5 215 4964 4734 4.524 4332 41543990 28 16.663 14898 3.406 1237 1051 10116 9307 8602 7984 7441 6961 6534 6152 5810 5502 5223 4970 47394528 4335 4157 3992 29 16984 5141 13.591 12278 11158 10198 9370 8650 8022 7470 6983 6551 6166 5820 5510 5229 4 975 4743 4531 4337 4159 3.994 30 17292 15372 3.765 12.409 11258 0274 9427 8694 8055 74967003 6566 6177 5829 55775235 4979 4746 4534 433941603995 40 19793 17159 15046 13332 11925 0757 9779 8951 8244 7634 7105 6642 6233 5871 5548 5258 4997 4760 4544 4347 4166 3999
