Question

Legend Service Center just purchased an automobile hoist for $35,100. The hoist has an 8-year life and an estimated salvage value of $3,120. Installation costs and freight charges were $3,500 and $800, 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 6 extra mufflers per week. Each muffler sells for $74 installed. The cost of a muffler is $39, and the labor cost to install a muffler is $15. (a) Compute the cash payback period for the new hoist. (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period years (b) Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e.g. 10.5.) Annual rate of return %

Answer 1

a) Cash payback period = Initial investment / Annual cash inflows = $39,400 /$6,240= 6.31 years

b) Annual rate of return = Average annual income / Average investment= $1,705 / $21,260 = 8.0%

Step-by-step explanation:

a)

Initial investment = Cost of automobile hoist + Installation cost + Freight charges

= $35,100 + $3,500 + $800 = $39,400

Annual cash inflows = 6 × ($74 -$39 -$15) ×52 = $6,240

Cash payback period = Initial investment / Annual cash inflows = $39,400 /$6,240= 6.31 years

b)

Average annual income = Annual cash inflows - Depreciation = $6,240 - [($39,400 - $3,120)/8] = $1,705

Average investment = (Cost + Salvage value)/2 = ($39,400 + $,3120)/2 = $21,260

Annual rate of return = Average annual income / Average investment= $1,705 / $21,260 = 8.0%