Royce Service Center just purchased an automobile hoist for $15,362. The hoist h
ID: 2484014 • Letter: R
Question
Royce Service Center just purchased an automobile hoist for $15,362. The hoist has a 5-year life and an estimated salvage value of $1,005. Installation costs were $2,937, and freight charges were $810. Royce uses straight-line depreciation.
The new hoist will be used to replace mufflers and tires on automobiles. Royce estimates that the new hoist will enable his mechanics to replace 4 extra mufflers per week. Each muffler sells for $65 installed. The cost of a muffler is $35, and the labor cost to install a muffler is $14.
Instructions
Compute the payback period for the new hoist.
years
Compute the annual rate of return for the new hoist.
%
Explanation / Answer
Answer: incremental cash flows: 4 per week * 52 weeks per year * (65 - 35 - 14) = 3328 per year
begin book: 15362 + 2937 + 810 = 19109
depreciation per year: (19,109 - 1005) / 4 = 4,526...you don't give a tax rate so you cannot compute the tax shelter (benefit) of depreciation. Assuming no taxes...
CF = Cash Flow
CF0 = (19109)
CFs 1-4: 3328
CF5: 3328 + 1005 = 4333
total return: (3328*4) + 4333 = 17645
annualized return: (1 + 17645/19109)^1/5 - 1 = 0.13975, or about 13.98%
payback period:
after 4 years: 19109 - (3328*4) =5797
CFs per week: 4*16 = 64
5797/64 = 90.58 weeks (which is 90.58/52 = 1.74 years)
payback period: 5.74 years
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