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 chery 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 avergae of $40,000 per year to transient workers to pick the cherries.

B. The cherry picker would cost $94,500. It would be depreciated using the straight line method and would have no salvage value at the end of its 12 year useful life.

C. Annual out of pocket cost associated with the cherry picker would include the cost of an operator and an assistant, $14,000; insurance, $200; fuel, $1,800; and a maintenance contract, $3,000.

1. Determine the annual savings in cash operating costs that would be realized if the cherry picker were purchased.
2. Compute the simple rate of return expected from the cherry picker. Would the cherry picker be purchased if Elberta Fruit Farm's required rate of return is 16%?
3. Compute the payback period on the cherry picker. The Elberta Fruit Fark will not purchase equipment unless it has a payback period of five years or less. Would the cherry picker be purchased?
4. Compute (to the nearest whole percent) the internal rate of return promised by the cherry picker. Based on this computation, does it appear that the simple rate of return is an accurate guide in investment decisions?