Legend Service Center just purchased an automobile hoist for S33,700. The hoist
ID: 2481928 • Letter: L
Question
Legend Service Center just purchased an automobile hoist for S33,700. The hoist has an 8-year life and an estimated salvage value of $3,640. Installation costs and freight charges were $3,550 and $820, 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 $72 installed. The cost of a muffler is $39, and the labor cost to install a muffler is $13. Compute the cash payback period for the new hoist. (Round answer to 2 decimal places, e.g. 10.50.) Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e.g. 10.5.)Explanation / Answer
a) Annual cash income :
Per muffler income = 72 -39 -13 =$ 20 per muffler
Annual cash income = 20 * 6 *52 = $ 6240
2)Initial cost = 33700 + 3550 +820 = 38070
3) cummulative cash flow up to year 6 =-38070 + ( 6240 *6) = -630
Payback period = year up to cummulative cash flow is negative +(cummulative cash flow of year /cash flow of next year)
= 6 + (630 / 6240)
= 6 + .10
= 6.10 years
b)Depreciation = (38070 - 3640) /8
= 4303.75
Accounting income = Annual cash income - depreciation
= 6240 - 4303.75
= 1936.25
Average accounting income for 8years = ](1936.25 * 8 ) +3640 ) /8
= [ 15490 + 3640 ]/8
= 19130 / 8
= 2391.25
Annual rate of return = 2391.25 / 38070
= .0628 or 6.3 %
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