Alameda Service Center just purchased an automobile hoise for $14,160. The hoist

Question

Alameda Service Center just purchased an automobile hoise for $14,160. The hoist has a 6 year life and an estimated salvage value of $1,125. Installation costs were $3,010 and freight charges were $800. Alameda uses straight-line depreciation.

The new hoist will be used to replace mufflers and tires on automobiles. Alameda estimates that the new hoist will enable his mechanics to replace 4 extra mufflers per week. Each muffler sells for $86 installed. The cost of a muffler is $24, and the labor cost to install a muffler is $11.

a) Compute the payback period for the new hoist in years.

b) Compute the annual rate of return for the new hoist.

Explanation / Answer

COST OF HOIST = (14160+3010+800)

=17970

ANNUAL DEPRECIATION ON HOIST = (17970-1125)/6

=2807.5

ANNUAL ADDITIONAL INCOME BY HOIST = (86-24-11)*4*52

=10608

a] the payback period for the new hoist = 1 + (16845-10608)/10608

=1.59 yeras

b]the annual rate of return for the new hoist.= (10608/16845)*100

=6.3%

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