Question

Larry’s Service Center just purchased an automobile hoist for $35,000. The hoist has a 6-year life and an estimated salvage value of $5,000. Larry uses straight-line depreciation. The company’s required rate of return is 8%.

The new hoist will be used to replace mufflers on automobiles. Larry’s estimates that the new hoist will enable his mechanics to replace 6 extra mufflers per week. Each muffler sells for $80 installed. The cost of a muffler is $40 and the labor cost to install a muffler is $10. The shop is open 52 weeks each year.

- Annual straight-Line Depreciation Expense:

- Net Annual Cash Inflow:

- Average Annual Net Income:

- Average Investment:

- Compute the cash payback period:

- Compute the annual rate of return:

- Compute the net present value (assume PVF= 0.5403 and PVAF= 5.7466):

- Should the hoist be purchased?

( Show work please )

Answer 1

Annual straight line depreciation:
Cost of equipmnete			35000
Less: salvage value			-5000
Depreciable cost			30000
Divide: Life			6
Annual depreciation			5000
Net annual cash inflows:
units (6*52)			312
Selling price		80
Less: variable cost per unit		50
CM per unit			30
Annual contribution			9360
Annnual Cash inflow			9360
Averagge investment = 35000+5000 / 2 = 20000
Cash payback period = Initial investment / Aannual cashinflows
		35000 / 9360 = 3.74 year
Annual rate of return = Net income / Average investment
		(9360-5000) / 20000 *100 = 21.80%
NPV:
Annual inflows			9360
Annuity PVf			5.7466
Present value of inflows			53788.18
Present value of salvage			2701.5
(5000*0.5403)
Total inflows			56489.68
Less:; investment			35000
NPV			21489.68
Yes, the project shall be accepted