Legend Service Center just purchased an automobile hoist for $33,600. The hoist
ID: 2800578 • Letter: L
Question
Legend Service Center just purchased an automobile hoist for $33,600. The hoist has an 8-year life and an estimated salvage value of $3,290. Installation costs and freight charges were $4,220 and $780, 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 $38, and the labor cost to install a muffler is $14.
(a)
Compute the cash payback period for the new hois
(b)
Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e.g. 10.5.)
Explanation / Answer
A. Computation of payback period:
Year
Cash flows
Cumulative cash flows
0
$33,600 + 4,220+ 780 = (38,600)
(38,600)
1
6,240
-32,360
2
6240
-26120
3
6240
-19880
4
6240
-13640
5
6240
-7400
6
6240
-1160
7
6240
5080
8
9530
14610
Payback period
=6+(1,160/6,240)
=6.19years
Periodic cash flows = number of extra mufflers * 52 weeks * contribution per unit
= 5 * 52* (76-38-14)
= $6,240
Formula for Payback period = initial investment /periodic cash flows
= $38,600 / 6,240 = 6.19 years.
b. Computation of Annual rate of return for the new hoist:
Formula for Average annual rate of return = Net income / Average investment
= (Net cash flows - depreciation) / (initial investment + depreciation)/2
= $6,240 - 4,414 / (38,600+ 3,290)/2
= 1,826 / 20,945 = 8.72% = 8.7% (rounded)
Year
Cash flows
Cumulative cash flows
0
$33,600 + 4,220+ 780 = (38,600)
(38,600)
1
6,240
-32,360
2
6240
-26120
3
6240
-19880
4
6240
-13640
5
6240
-7400
6
6240
-1160
7
6240
5080
8
9530
14610
Payback period
=6+(1,160/6,240)
=6.19years
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.