Question

Legend Service Center just purchased an automobile hoist for $37,200. The hoist has an 8-year life and an estimated salvage value of $3,400. Installation costs and freight charges were $2,600 and $800, respectively. Legend uses straight-line depreciation. The new hoist will be used to replace mufflers and tires an 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 $37, and the labor cost to install a muffler is $15.

(a) Compute the cash payback period for the new hoist. Cash payback period = _______ YEARS

(b) Compute the annual rate of return for the new hoist. (Round answer to 2 decimal places, e.g. 10.529.)

Annual rate of return = ________

Answer 1

Cash payback period is calculated for evaluation of the investment proposal

Answer a).

Computing the cash payback period for the new hoist.

Note :- Since rate of tax is not provided, depreciation is ignored in calculation of Net cash flow after tax for the purpose of calculating cash payback period.

Cost of Automobile Hoist 1] Purchase price $37200 + Installation Costs 2600 + Freight charges 800 I Total Test of Automobile Hoist 40600 $72 (37) (15) $20 b Calculating Contribution per mufflers L Selling price He cost of mufflers Jo Labor cost # Contribution per mufflers a calculating number of mufflers sold annually No. of mufflers sold (extra) per week 5 mufflers x No of weeks in a year. I Total number of mufflers sold (annually) 260 mufflers x 52 weeks 4] Net annual Cash flow:- number of mufflers sold x Contribution per muffler. Net Annual cash flows 260 x 20 5200

la] computing Cash payback period a] cash payback period = Initial Capital Investment | Net: Annual Cash flow 40600 5200 I Cash payback period = 7.81 years or 7 years 42 weeks b] Computing Annual Rate of return for the new hoist. Step 1:- Computing Depreciation (straight line method). Depreciation - Initial Investment - Salvage. Value - useful life. Depreciation = 60600 - 3400 | Depreciation = $4650 Step 2 - Average Annual Net Income (After) tax. - Net Contribution - Depreciation. 25200 - 4650 = $550

step. 3 :- Annual rate of return = Average Annual Net Income / Initial Investment x 100 = (5200 - 4650) x 100 / 40600 Annual rate of return = 1.35%