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Simple Rate of Return/IRR/Payback

Chateau is winery in France, which is headed by Gerald Despinoy. Doing the fall season, is the busiest part of the year, and partime workers are hired to pick and process grapes. Gerald is currently looking for a harvesting machine to reduce the labor needed for picking.

Addl info :( = represent French currency euro

The winery could save (=190,000 a yr in labor, and the company wouldn't have to purchase mulch-est. annual savings of (=10,000

The cost of the machine is (=480,000 with an estimated 12 yr useful life and zero salvage value. The winery uses straight line depreciation

Annual out of pocket cost:
Insurance (=1,000
Fuel (=9,000
Maintance contract (=12,000
2 operators for machine (=70,000yr what they would be paid total including all benefits

Gerald feels that the machine should earn at least 16%rate of return

1. Determine the annual net savings cash operating cost that would be realized if the machine was purchased
2. Compute the simple rate of return expected from the machine
3. Compute the payback period on the machine, Gerald won't purchase the machine unless it has a payback period of 5yrs or less
4. With the above information do you think this machine will benefit the company?
5. Compute (to the nearest whole percent) the internal rate of return promised by the machine and from the computation is the simple rate of return an accurate guide investing

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Solution Summary

The solution explains the calculation of simple rate of return, internal rate of return and payback period