Problem $12-24($Algo$)$ Simple Rate of Return; Payback Period; Internal Rate of Return $[$LO$121,$ LO$12-3,$ LO$12-6]$

The Elberta Fruit Farm of Ontario is considering buying a cherry$-$picking machine to replace the part$-$time workers it usually hires to harvest its annual cherry crop. The machine shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. The company gathered the following information:

a$.$ The farm pays part$-$time workers $$230,000$ per year to pick the cherries.

b$.$ The cherry picker would cost $$670,000,$ have a $10-$year useful life with no salvage value, and be depreciated using the straight$-$line method.

c$.$ The cherry picker's annual out$-$of$-$pocket costs would be cost of an operator and an assistant, $$93,000$; insurance, $$2,000$; fuel, $$10,000$; and a maintenance contract, $$13,000.$

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

Required:

Calculate the annual savings in cash operating costs provided by the cherry picker.

$2$a$.$ Compute the cherry picker's simple rate of return.

$2$b$.$ Would Eiberta Fruit Farm buy the cherry picker if its required rate of return is $11\%?$

$3$a$.$ Compute the cherry picker's payback period.

$3$b$.$ Would Elberta Fruit Farm purchase the cherry picker if it requires a payback period of six years or less?

$4$a$.$ Compute the cherry picker's internal rate of return.

$4$b$.$ Does it appear the simple rate of return is an accurate guide in investment decisions?

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