Legend Service Center just purchased an automobile hoist for $33,700. The hoist

Question

Legend Service Center just purchased an automobile hoist for $33,700. 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.

(a)

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

(b)

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

Cash payback period

years

Explanation / Answer

a. Cash payback period= Initial investment/ annual cash flow

Initial investment:

Cash flow per year:

Cash payback period= 38070/6240= 6.1 years

b. annual return= 6240/38070= 16.39%

New hoist 33700 Installation 3550 Freight 820 Investment 38070

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