Reference no: EM132937554
Question - The Green Kiwi Farming Company is considering replacing fruit pickers with a fruit-picking machine. Each year, the company spends $80 000 on fruit pickers. These pickers will no longer be required if the fruit-picking machine is acquired.
The relevant costs are as follows:
Cost of acquiring the fruit-picking machine $200 000
Annual insurance costs for the fruit-picking machine $10 000
Annual registration costs for the fruit-picking machine $3 000
Expected annual fuel cost of running the fruit-picking machine $6 000
Fixed price maintenance contract for the fruit-picking machine, per year $4 000
Expected life of the fruit-picking machine 8 years
Expected residual value at the end of the machine's useful life $10 000
Required - You are asked by the owner of the Green Kiwi Farming Company to assess this potential capital investment.
-Calculate the annual net cash flows assuming that the income and expenses remain the same each year and that the costs and cashflows occur in the same period. Show all your workings.
-Calculate the payback period of this investment. Show all your workings.
-Calculate the accounting rate of return for this investment. Ensure that you consider the depreciation costs and show all your workings.
-Calculate the net present value of this investment using an interest rate of 10%.
-Make a recommendation (with reasons) as to whether to acquire the fruit-picking machine. Management would like the machine to:
- Achieve a payback period of less than six years.
- Generate an accounting rate of return of at least 18 per cent.
- Generate a positive net present value at an interest rate of 10 per cent.