Brady Service Center just purchased an automobile hoist for $35,000. The hoist h

Question

Brady Service Center just purchased an automobile hoist for $35,000. The hoist has an 8-year life and an estimated salvage value of $3,000. Installation costs and freight charges were $3,300 and $700, 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 5 extra mufflers per week. Each muffler sells for $72 installed. The cost of a muffler is $36, and the labor cost to install a muffler is $12.

(Please show calculations to better understand the problem and how to solve it, thank you.)

Explanation / Answer

Weeks in a year = 52

Increased annual benefits = 5*52*(72-36-12) = 6240

Total initial cost = 35000+3300+700 = 39000

Depreciation= (39000-3000)/8= 4500

Annual cash flow = 6240

salvage value = 3000

cash payback period = 5 + (39000-5*6240)/6240 = 6.25 years

Let internal rate of return = IRR

NPV =0

-39000 + 6240/(1+IRR) + 6240/(1+IRR)^2 + 6240/(1+IRR)^3 + 6240/(1+IRR)^3....................9240/(1+IRR)^8 =0

Using exel function

internal rate of return, IRR = 7.00%

annual rate of return of the new hoise = annual cash flow/initial cost = 6240/39000= 16.00%

Initial cost -39000 Annual benefit 6240 6240 6240 6240 6240 6240 6240 6240 Salvage value 3000 Cash flow -39000 6240 6240 6240 6240 6240 6240 6240 9240

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