Chateau Beaune is a family-owned winery located in the Burgundy region of France
ID: 2504807 • Letter: C
Question
Chateau Beaune is a family-owned winery located in the Burgundy region of France, which is headed by Gerard Despinoy. The harvesting season in early fall is the busiest part of the year for the winery, and many part-time workers are hired to help pick and process grapes. Mr. Despinoy is investigating the purchase of a harvesting machine that would significantly reduce the amount of labor required in the picking process. The harvesting machine is built to straddle grapevines, which are laid out in lowlying rows. Two workers are carried on the machine just above ground level, one on each side of the vine. As the machine slowly crawls through the vineyard, the workers cut bunches of grapes from the vines, which then fall into a hopper. The machine separates the grapes from the stems and other woody debris. The debris are then pulverized and spread behind the machine as a rich ground mulch. Mr. Despinoy has gathered the following information relating to the decision of whether to purchase the machine:
The winery would save
Chateau Beaune is a family-owned winery located in the Burgundy region of France, which is headed by Gerard Despinoy. The harvesting season in early fall is the busiest part of the year for the winery, and many part-time workers are hired to help pick and process grapes. Mr. Despinoy is investigating the purchase of a harvesting machine that would significantly reduce the amount of labor required in the picking process. The harvesting machine is built to straddle grapevines, which are laid out in lowlying rows. Two workers are carried on the machine just above ground level, one on each side of the vine. As the machine slowly crawls through the vineyard, the workers cut bunches of grapes from the vines, which then fall into a hopper. The machine separates the grapes from the stems and other woody debris. The debris are then pulverized and spread behind the machine as a rich ground mulch. Mr. Despinoy has gathered the following information relating to the decision of whether to purchase the machine:
Explanation / Answer
annual net savings in cost Labour cost 190000 purchase of gr. Mulch saves 20000 Less : operator cost -92000 Insurance -1000 Fuel -9000 Maint. Contract -12000 Net savings in operation cost 96000 simple rate of return 0.145454545 Payback period 6.875 yes the machine should be purchased as the pay back period is less than 7 years IRR is 7.51 % Discounting rate Discounting rate Year 7 Cash flow Dsic. Cash flow 10 Cash flow Dsic. Cash flow 0 1.00 -660000 -660000.00 1.00 -660000 -660000.00 1 0.93 96000 89719.63 0.91 96000 87272.73 2 0.87 96000 83850.12 0.83 96000 79338.84 3 0.82 96000 78364.60 0.75 96000 72126.22 4 0.76 96000 73237.94 0.68 96000 65569.29 5 0.71 96000 68446.67 0.62 96000 59608.45 6 0.67 96000 63968.85 0.56 96000 54189.50 7 0.62 96000 59783.98 0.51 96000 49263.18 8 0.58 96000 55872.87 0.47 96000 44784.71 9 0.54 96000 52217.64 0.42 96000 40713.37 10 0.51 96000 48801.53 0.39 96000 37012.16 NPV 14263.83 -70121.56 IRR 7.51 No simple return is not an accurate guide to investment decision