Exercise 24-9 Legend Service Center just purchased an automobile hoist for $31,8

Question

Exercise 24-9

Legend Service Center just purchased an automobile hoist for $31,800. The hoist has an 8-year life and an estimated salvage value of $3,650. Installation costs and freight charges were $4,250 and $790, 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 5 extra mufflers per week. Each muffler sells for $76 installed. The cost of a muffler is $36, 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.)

Explanation / Answer

a)

Cost of automobile hoist = 31800

Installation cost and freight charges = 4250 + 790 = 5040

Total cost incurred at 0th time = 31800+5040 = 36840

Revenue from 5 extra mufflers per week = (76-36-13)*5 = 27*5 = 135

Cash payabck period in weeks = 36840/135 = 272.88 weeks

Cash payabck period in years = 272.88/52 = 5.25 years

b)

Average annual profit = 135*52 + 3650/8 = 7020 + 456.25 = 7476.25

Investment = 36840

Annual rate of return = 7476.25/36840 *100 = 20.29%

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