Requirement a:
Cash payback period = Original cost of the asset ÷ Cash inflows
= $37,280/$8,372
=4.45 years
Requirement b:
Annual rate of return = (Average annual net earnings ÷ Initial investment) x 100
= ($4,131/$37,280) x 100
=0.110810086 x 100
=11.0%
Calculations:
i. Cost of hoist:
Cost of hoist | |
Purchase price | $32,700 |
Installation costs | $3,710 |
Freight | $870 |
Total | $37,280 |
ii.Cash inflows:
Cash inflows | |
Revenue (7 mufflers x 52 weeks x $74) | $26,936 |
Costs of a muffler (7 mufflers x 52 weeks x $35) | ($12,740) |
Labor cost (7 mufflers x 52 weeks x $16) | ($5,824) |
Total | $8,372 |
iii.Net operating income:
Net operating income | |
Revenue (7 mufflers x 52 weeks x $74) | $26,936 |
Costs of a muffler (7 mufflers x 52 weeks x $35) | ($12,740) |
Labor cost (7 mufflers x 52 weeks x $16) | ($5,824) |
Depreciation (37,280-3,350)/8 years | ($4,241) |
Total | $4,131 |
Legend Service Center just purchased an automobile hoist for $32,700. The hoist has an 8-year life...
Legend Service Center just purchased an automobile hoist for $32,700. The hoist has an 8-year life and an estimated salvage value of $3,350. Installation costs and freight charges were $3,710 and $870, respectively. Legend uses straight-line depreciation. The new hoist will be used to replace mufflers and tires on automobiles. Legend estimates that the new hoist will enable his mechanics to replace 7 extra mufflers per week. Each muffler sells for $74 installed. The cost of a muffler is $35,...
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Legend Service Center just purchased an automobile hoist for $33,900. The hoist has an 8-year life and an estimated salvage value of $3,000. Installation costs and freight charges were $4,200 and $900, respectively. Legend uses straight-line depreciation. The new hoist will be used to replace mufflers and tires on automobiles. Legend estimates that the new hoist will enable his mechanics to replace 5 extra mufflers per week. Each muffler sells for $74 installed. The cost of a muffler is $35,...
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