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10 August, 02:42

Legend Service Center just purchased an automobile hoist for $34,300. The hoist has an 8-year life and an estimated salvage value of $3,900. Installation costs and freight charges were $3,380 and $880, 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 $40, and the labor cost to install a muffler is $14. (a) Compute the cash payback period for the new hoist. (Round answer to 2 decimal places, e. g. 10.50.) Cash payback period Legend Service Center just purchased an automobileyears (b) Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e. g. 10.5.) Annual rate of return Legend Service Center just purchased an automobile%

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  1. 10 August, 05:12
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    a) 6.74 years

    b) Annual rate of return = 3.6%

    Explanation:

    Given:

    Purchasing cost of the automobile hoist = $ 34,300

    Total life of the hoist = 8 years

    salvage value of the hoist = $ 3,900

    Installation cost of the hoist = $ 3,380

    Freight charges = $ 880

    Increase sales of muffler per week = 5

    Selling price for muffler = $ 76

    cost of a muffler = $40

    labor cost to install a muffler = $14

    a) cash payback period = (initial investment) / (Annual cash flow)

    now,

    Initial investment = cost of the hoist + Installation cost + Freight charges

    or

    Initial investment = $ 34,300 + $ 3,380 + $ 880 = $ 38,560

    annual cash flow is calculated as:

    = annual sales value of muffler - total material cost of muffler - labor cost of installing mufflers

    = (5 * 52 weeks * $ 76) - (5 * 52 weeks * $ 40) - (5 * 52 weeks * $ 14)

    = $ 19,760 - $ 10,400 - $ 3,640

    or

    Annual cash flow = $ 5,720

    Hence,

    Cash payback period = $ 38,560 / $ 5,720 = 6.74 years

    b) The annual rate of return is given as:

    = (Net income) / (initial investment)

    assuming the straight line method for depreciation,

    thus,

    Depreciation per year = (Initial investment - salvage value) / Total useful life

    = ($ 38,560 - $ 3,900) / 8

    or

    Depreciation per year = $4,332.5

    Thus,

    The net income after depreciation = $ 5,720 - $ 4,332.5

    or

    Net income = $ 1,387.5

    Hence,

    Annual rate of return = $ 1,387.5 / $ 38,560

    or

    Annual rate of return = 3.6%
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