Question

Legend Service Center just purchased an automobile hoist for $32,700. The hoist has an 8-year life and an estimated salvage value of $3,350. Installation costs and freight charges were $3,710 and $870, 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 7 extra mufflers per week. Each muffler sells for $74 installed. The cost of a muffler is $35, 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.) Cash payback period years (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 % Click if you would like to Show Work for this question: Open Show Work

Answer 1

Requirement a:

Cash payback period = Original cost of the asset ÷ Cash inflows

= $37,280/$8,372

=4.45 years

Requirement b:

Annual rate of return = (Average annual net earnings ÷ Initial investment) x 100

= ($4,131/$37,280) x 100

=0.110810086 x 100

=11.0%

Calculations:

i. Cost of hoist:

Cost of hoist
Purchase price	$32,700
Installation costs	$3,710
Freight	$870
Total	$37,280

ii.Cash inflows:

Cash inflows
Revenue (7 mufflers x 52 weeks x $74)	$26,936
Costs of a muffler (7 mufflers x 52 weeks x $35)	($12,740)
Labor cost (7 mufflers x 52 weeks x $16)	($5,824)
Total	$8,372

iii.Net operating income:

Net operating income
Revenue (7 mufflers x 52 weeks x $74)	$26,936
Costs of a muffler (7 mufflers x 52 weeks x $35)	($12,740)
Labor cost (7 mufflers x 52 weeks x $16)	($5,824)
Depreciation (37,280-3,350)/8 years	($4,241)
Total	$4,131