Legend Service Center just purchased an automobile hoist for $32,400. The hoist has an 8-year life and an estimated salvage value of $3,000. Installation costs and freight charges were $3,300 and $700, 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 $72 installed. The cost of a muffler is $36, and the labor cost to install a muffler is $16. (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.)

Question

Bruce Hogan

Business

16 December, 23:13

Legend Service Center just purchased an automobile hoist for $32,400. The hoist has an 8-year life and an estimated salvage value of $3,000. Installation costs and freight charges were $3,300 and $700, 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 $72 installed. The cost of a muffler is $36, and the labor cost to install a muffler is $16. (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.)

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Answers (1)

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Big Mac · Answer 1

a) 316.52 weeks or 6.09 years

b) 4.96%

Explanation:

F0 cost: 32,400 + 3,300 + 700 = 36,400

profit per week:

5 units x (75 sales - 36 materials - 16 materials) = 115

payback period: time at which the project pay for itself regardless of the time value of money

36,400 / 115 = 316.52 weeks

in years: 316.52 / 52 weeks per year = 6.09 years

annual rate of return:

net income / investment

115 contribution per week x 52 week

- 4,175 depreciation expense * = 1,805 income

1,805/36,400 = 0.0496 = 4.96%

* (cost - salvage value) / useful life

(36,400 - 3,000) / 8 = 4,175