Legend Service Center just purchased an automobile hoist for $32,400. The hoist

Question

Legend Service Center just purchased an automobile hoist for $32,400. The hoist has an 8-year life and an estimated salvage value of $3,000. Installation costs and freight charges were $3,300 and $700, 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 $72 installed. The cost of a muffler is $36, and the labor cost to install a muffler is $16.

(a) Compute the cash payback period for the new hoist. (Round answer to 2 decimal places, e.g. 10.50.)

(b) Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e.g. 10.5.)

Explanation / Answer

(a) Payback period = initial cash outflow / annual cash inflow per year

   =($32400 + 3300 + 700) / $5200

=$36400 / $5200

=7 years

Note:-   Annual cash inflow per year :

Per week 5 muffler , that means 52 week in one year, yearly sale of muffler

   Sale of muffler (52week * 5 *$72) =$18720

less: cost of muffler ($36*5*52 week) = $9360

less: labour cost ($16 * 5 *52 week) = $4160

Cash inflow per year $5200

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