You grow 200 acres of canning peaches every year. The average yield is 20 tons per acre. You have been paying a labor contractor $150 per ton to harvest the peaches every year. You have been investigating a mechanical harvester for the peaches which costs $350,000 and has a 7 year economic life. To estimate its annual cost, use a straight line depreciation. If you buy the harvester you will no longer have to pay the $150 per ton cost of hand picking the peaches, but you will have to hire 4 people at $25 per ton harvested to run the harvest machinery. The yield remains the same with the harvester. The harvester will require fuel and maintenance at $50 per ton harvested. Finally, you estimate that the machine harvested peaches will have slightly less quality, reducing the annual gross income by $100,000.
Problem 1: Should you replace the hand picking with the mechanical harvester? Use a partial budget model to answer this question, and show your work.