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

a$.$ Currently, the farm is paying an average of $$270,000$ per year to transient workers to pick the cherries.

b$.$ The cherry picker would cost $$660,000.$ 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.

c$.$ Annual out$-$of$-$pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $$82,000$; insurance, $$4,000$; fuel, $$14,000$; and a maintenance contract, $$12,000.$

Click here to view Exhibit $12$B$-1$ and Exhibit $12$B$-2,$ to determine the appropriate discount factor using tables.

Required:

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:

$2b.$ Would the cherry picker be purchased if Elberta Fruit Farm's required rate of return is $18\%?$

$3$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 four years or less. Would the cherry picker be purchased?

$4$a$.$ 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?

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Determine the annual savings in cash operating costs that would be realized if the cherry picker were purchased.

Annual savings in cash operating costs