A company just purchased a hoist for $37,300. It has an 8 year life and estimate

Question

A company just purchased a hoist for $37,300. It has an 8 year life and estimated salvage value of $3,600. Installation and freight charges are $3,400 and $900 respectively. Straight line depreciation. The hoist will allow mechanics to replace 5 extra mufflers per week. Each muffler sells for $73 installed. The cost of a muffler is $39 and the labor cost to install a muffler is $14. A) compute the cash payback period for the new hoist B) compute the annual rate of return (percentage) A company just purchased a hoist for $37,300. It has an 8 year life and estimated salvage value of $3,600. Installation and freight charges are $3,400 and $900 respectively. Straight line depreciation. The hoist will allow mechanics to replace 5 extra mufflers per week. Each muffler sells for $73 installed. The cost of a muffler is $39 and the labor cost to install a muffler is $14. A) compute the cash payback period for the new hoist B) compute the annual rate of return (percentage) A) compute the cash payback period for the new hoist B) compute the annual rate of return (percentage)

Explanation / Answer

Additional Units produced per week 5 units Additional units produced annually 260 units Incremental sales revenue (260 units @73) 18980 Less: Incremental Cost Material (260 units @39) 10140 Labour (260 units @ 14) 3640 Annual depreciation 4750 (37300+3400+900-3600)/8 years Net Income 450 Add: Annual Depreciation 4750 Annual Cash inflows 5200 Initial Investment (37300+3400+900) 41600 Average Investment (41600)/2 20800 Rreq A: Payback period: Initial Investment / Annual cash inflows 41600 /5200 = 8 years Req B: Accounting rate of return: Annual Net income/ Average investment 450 /20800 *100 = 2.16%

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