Reference no: EM13570431

Chateau Sneuti is a family owned winery in the Bordeau region of France. Harvesting season in early fall is the busy season and uses many part time workers to pick and process grapes. The manager Monsieur upair Sneuti is looking into a machine that would semi-automate the process. The machine straddles the rows but would still need two riders, one on each side of the row, to clip off the grape bunches and drop them in a hopper. The machine separates out the grapes and the woody stems. The stems are then pulverized and spread behind the machine as mulch. Here is the financial data Mr. Sneuti has gathered so far:

1. Labor costs would be $190,000 lower. And they would no longer need to buy mulch which would save another $10,000.
2. The machine itself would cost $480,000. It would have an estimated 12 year life and no salvage value. The winery uses Straight line depreciation.
3. Out of pocket costs would be $1000 for insurance; $9000 for fuel; $12,000 for a maintenance contract. In addition, 2 operators would have to be hired and trained. They would be paid a total of $70,000 per year including all fringe benefits and payroll costs.
4. Mr. Sneuti feels that his opportunity cost of money is about 8%. For this problem assume there is no income tax but only a VAT (so no tax issues for purposes of this problem).

REQUIRED:

1. Even though you could treat every single item above separately, it is common to take the recurring annual costs and compute those as a subtotal to use in your computations.
   1. Compute the total CASH operating flows that recur every year.  
   2. Compute the total NET accrual basis flows that recur every year. (Then Use the appropriate one below).
2. Compute the simple rate of return. Use original investment.   Then re-do using average investment.
3. Compute the payback period.    Mr. Sneuti's goal is for the payback to be 5 years or less.
4. Compute the Net Present Value and Profitability Index. Use EXCEL.
5. Compute the Internal Rate of Return. (IF you used EXCEL and formulas rather than just table values (formulas appear at bottom of table) to do #4 ... you can use this spreadsheet to do IRR work by changing the discount rate to force a NPV close to 0.)