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 $200,000 per year to transient workers to pick the cherries. The cherry picker would cost $250,000. It would be depreciated using the straight-line method and it would have no salvage value at the end of its 8-year useful life. Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $98,000; insurance, $5,000; fuel, $15,000; and a maintenance contract, $20,000. Click here to view Exhibit 14B-1 and Exhibit 14B-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. 2b. Would the cherry picker be purchased if Elberta Fruit Farm’s required rate of return is 18%? 3a. Compute the payback period on the cherry picker. 3b. The Elberta Fruit Farm will not purchase equipment unless it has a payback period of five years or less. Would the cherry picker be purchased? 4a. 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?

Principles of Cost Accounting

17th Edition

ISBN:9781305087408

Author:Edward J. Vanderbeck, Maria R. Mitchell

Publisher:Edward J. Vanderbeck, Maria R. Mitchell

Chapter10: Cost Analysis For Management Decision Making

Section: Chapter Questions

Problem 14P

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Question

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 $200,000 per year to transient workers to pick the cherries.
The cherry picker would cost $250,000. It would be depreciated using the straight-line method and it would have no salvage value at the end of its 8-year useful life.
Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $98,000; insurance, $5,000; fuel, $15,000; and a maintenance contract, $20,000.

Click here to view Exhibit 14B-1 and Exhibit 14B-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.

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

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

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

4a. 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?

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:
a. Currently, the farm is paying an average of $200,000 per year to transient workers to pick the cherries.
b. The cherry picker would cost $250,000. It would be depreciated using the straight-line method and it would have no salvage value
at the end of its 8-year useful life.
C. Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $98,000; insurance,
$5,000; fuel, $15,000; and a maintenance contract, $20,000.
Click here to view Exhibit 14B-1 and Exhibit 14B-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.
2b. Would the cherry picker be purchased if Elberta Fruit Farm's required rate of return is 18%?
3a. Compute the payback period on the cherry picker.
3b. The Elberta Fruit Farm will not purchase equipment unless it has a payback period of five years or less. Would the cherry picker be
purchased?
4a. 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?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2A
Req 2B
Req 3A
Req 3B
Req 4A
Req 4B
Determine the annual savings in cash operating costs that would be realized if the cherry picker were purchased.
Annual savings in cash operating costs
< Req 1
Req 2A >

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