Legend Service Center just purchased an automobile hoist for $31,400. The hoist

Question

Legend Service Center just purchased an automobile hoist for $31,400. The hoist has an 8-year life and an estimated salvage value of $3,030. Installation costs and freight charges were $4,180 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 5 extra mufflers per week. Each muffler sells for $72 installed. The cost of a muffler is $35, and the labor cost to install a muffler is $14. Compute the cash payback period for the new hoist. Cash payback period years Compute the annual rate of return for the new hoist. Annual rate of return

Explanation / Answer

Initial Investment = Automobile hoist + Installation Cost + Freight Charges

Initial Investment = 31400 + 4180 + 870

Initial Investment = $36 450

Salvage Value = 3030

Life = 8

Annual Depreciation = (Initial Investment - Salvage Value )/Life

Annual Depreciation = (36450-3030)/8

Annual Depreciation = $4,177.5.

Average Investment =  (Initial Investment + Salvage Value )/2

Average Investment = (36450+3030)/2

Average Investment = $ 19740

Annual Cash Flow = (72 -35-14)*5*52

Annual Cash Flow = $ 5980

Annual Net Income = Annual Cash Flow - Annual Deprecitaion

Annual Net Income = 5980-4177.5

Annual Net Income = 1802.5

1) Cash Payback period = Initial Investment/Annual Cash Flow

Cash Payback period = 36450/5980

Cash Payback period = 6.09 years

2) Annual Rate of Return = Annual Net Income/Average Investment

Annual Rate of Return = 1802.5/19740

Annual Rate of Return = 9.13%

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