Chateau Beaune is a family-owned winery headed by Gerard Despinoy and located in the Burgundy region of
Question:
a. The winery would save €190,000 per year in labour costs with the new harvesting machine. In addition, the company would no longer have to purchase and spread ground mulch—at an annual savings of €10,000. (The French currency is the euro, which is denoted by the symbol €.)
b. The harvesting machine would cost €480,000. It would have an estimated 12-year useful life and zero salvage value. The winery uses straight-line depreciation.
c. Annual out-of-pocket costs associated with the harvesting machine would be insurance, €1,000; fuel, €9,000; and a maintenance contract, €12,000. In addition, two operators would be hired and trained for the machine, and they would be paid a total of €70,000 per year, including all benefits.
d. Despinoy feels that the investment in the harvesting machine should earn at least a 16% rate of return.
Required:
Ignore income taxes.
1. Determine the annual net savings in cash operating costs that would be realized if the harvesting machine were purchased.
2. Compute the simple rate of return expected from the harvesting machine.
3. Compute the payback period on the harvesting machine. Despinoy will not purchase equipment unless it has a payback period of five years or less. Under this criterion, should the harvesting machine be purchased?
4. Compute (to the nearest whole percentage point) the IRR promised by the harvesting machine. Based on this computation, does it appear that the simple rate of return is an accurate guide in investment decisions?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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Related Book For
Managerial Accounting
ISBN: 978-1259024900
9th canadian edition
Authors: Ray Garrison, Theresa Libby, Alan Webb
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