Brady Service Center just purchased an automobile hoist for $33,870. The hoist h

Question

Brady Service Center just purchased an automobile hoist for $33,870. The hoist has an 8-year life and an estimated salvage value of $3,680. Installation costs and freight charges were $3,849 and $850, respectively. Brady uses straight-line depreciation.
The new hoist will be used to replace mufflers and tires on automobiles. Brady estimates that the new hoist will enable his mechanics to replace 6 extra mufflers per week. Each muffler sells for $74 installed. The cost of a muffler is $37, and the labor cost to install a muffler is $17.

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

CASH PAYBACK PERIOD _____________ YEARS

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

ANNUAL RATE OF RETURN ____________________________%

Brady Service Center just purchased an automobile hoist for $33,870. The hoist has an 8-year life and an estimated salvage value of $3,680. Installation costs and freight charges were $3,849 and $850, respectively. Brady uses straight-line depreciation.
The new hoist will be used to replace mufflers and tires on automobiles. Brady estimates that the new hoist will enable his mechanics to replace 6 extra mufflers per week. Each muffler sells for $74 installed. The cost of a muffler is $37, and the labor cost to install a muffler is $17.

Explanation / Answer

1.

Cost of hoist = $33,870 + $3,849 + $850 = $38,569.

Number of extra mufflers for the year = 6 * 52 weeks = 312 mufflers

Contribution margin per muffler = Selling price – Cost of muffler – Labor cost per muffler = $74 - $37 - $17 = $20 per muffler

Net annual cash flow = Number of extra mufflers * Contribution margin per muffler = $20 * 312 mufflers = $6,240

Cash payback period = Cost of Hoist/Net annual cash inflow = $38,569/$6,240 = 6.18 years.

2.

Average investment = (Cost of Hoist + Salvage Value)/2 = ($38,569 + $3,680)/2 = $21,124.50

Annual depreciation = (Cost of Hoist - Salvage Value)/Useful life of Hoist = ($38,569 - $3,680)/8 = $4,361.13

Net Income = Net annual cash flow – Annual depreciation = $6,240 - $4,361.13 = $1,878.87

Annual rate of return = Net income/Average investment = $1,878.87/$21,124.50 = 0.0889 = 8.9%

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