Legend Service Center just purchased an automobile hoist for $31,300. The hoist

Question

Legend Service Center just purchased an automobile hoist for $31,300. The hoist has an 8-year life and an estimated salvage value of $3,960. Installation costs and freight charges were $3,510 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 6 extra mufflers per week. Each muffler sells for $71 installed. The cost of a muffler is $37, and the labor cost to install a muffler is $12.

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

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

Explanation / Answer

Purchased an automobile hoist $     31,300 Installation costs $       3,510 freight charges $          700 Total cost $     35,510 Less: Estimated salvage value $       3,960 Adjusted basis $     31,550 Life of automobile hoist                 8 Depreciation per year $ 3,943.75 Number of extra mufflers per week                 6 Total number of extra mufflers in year = 6*52             312 SP of mufflers $           71 Revenue generated in year $     22,152 Less: Cost of muffler = 37 x 312 $     11,544 Labor cost for installation = 12 x 312 $       3,744 Total cost $     15,288 Gross income = 22152 - 15288 $       6,864 Less: Installation costs $       3,510 freight charges $          700 Cumulative cash flows Cash flow for 1st year $       2,654 $ 2,654 Cash flow for 2nd year (Since fright cost and installation cost are one time cost) $       6,864 $ 9,518 Cash flow for 3rd Year $       6,864 $16,382 Cash flow for 4th year $       6,864 $23,246 Cash flow for 5th year $       6,864 $30,110 Cash flow for 6th year $       6,864 $36,974 Cash flow for 7th year $       6,864 $43,838 Cash flow for 8th year = 6864+3960 $     10,824 $54,662 Payback period = 5 years + (35510 - 30110) x 12/10 = 5.94 years ARR for 1st year = 2654/35510 7.47% ARR for 2nd year onwards = 6864 / 35510 19.33%

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.