Question

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, and the labor cost to install a muffler is $14. (a) Compute the cash payback period for the new hoist. Cash payback period years Compute the annual rate of return for the new hoist. (Round answer to 2 decimal places, e.g. 10.52%.) Annual rate of return

Answer 1

Pay-back period - Original cost of Assets / Cash inflow Original Cost of the assets = (Cost + Installation cost + Freight) Original Cost of the assets = (33900+4200+900) Original Cost of the assets = $ 39,000/. Total cost of each Muffler = (cost of a muffler+ labor cost to install) Total cost of each Muffler = (35+14) Total cost of each Muffler = S 49/. Selling price of each Muffler = $ 74/. Total cash inflow per week for each Muffler = (74-49) Total cash inflow per week for each Muffler = $ 25/. Total Mufflers per week = 5 Total cash flow per week = (5*25) = $ 125/. Total cash flow per year = (125*52 weeks) = $ 6,500/. Payback period = (39000/6500) Payback period = 6 years The annual rate of return = (Expected annual income / Average Investment) x 100 Depreciation expenses = (39000-3000)/8 Depreciation expenses = $ 4,500/. Expected annual income = (Total cash flow per year - Depreciation expense) Expected annual income = (6500-4500) Expected annual income = 5 2,000/. Average Investment - (Cost+Salvage value)/2 = (39000+3000)/2 = $ 21,000/. The annual rate of return = (2000/21000)*100 The annual rate of return = 9.52%