Legend Service Center just purchased an automobile hoist for $33,800. The hoist

Question

Legend Service Center just purchased an automobile hoist for $33,800. The hoist has an 8-year life and an estimated salvage value of $3,140. Installation costs and freight charges were $4,260 and $900, 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 $74 installed. The cost of a muffler is $38, and the labor cost to install a muffler is $16.

(b)

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

Explanation / Answer

Annual rate of return = net income*100/initial investment

Initial investment = (33800+4260+900) = 38960

Net income = (74-38-16)*5*52-(38960-3140/8) = 722.50

Average investment = (38960+3140/2) = 21050

Annual rate of return = 722.50*100/21050 = 3.43%

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