Brady Service Center just purchased an automobile hoist for $31,990. The hoist h
ID: 2404325 • Letter: B
Question
Brady Service Center just purchased an automobile hoist for $31,990. The hoist has an 8-year life and an estimated salvage value of $3,650. Installation costs and freight charges were $4,136 and $810, respectively. Brady uses straight-line depreciation The new hoist will be used to replace mufflers and tires on automobiles. Brady estimates that the new hoist will enable his mechanics to replace 5 extra mufflers per week. Each muffler sells for $75 installed. The cost of a muffler is $39, and the labor cost to install a muffler is $14. Compute the cash payback period for the new hoist. (Round answer to 2 decimal places, e.g. 10.50. Cash payback period years 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 WorkExplanation / Answer
1.
Initial cost of equipment = Purchased cost + installation cost + freight cost
= $ 31,990 + $ 4,136 + $ 810 = $ 36,936
Profit on each muffles installation = sales – cost of muffles – labor cost
= $ 75 - $ 39 - $ 14 = $ 22
Annual profit due to new hoist = 52 x 5 x $ 22 = $ 5,720
Year
Cash Flow
‘Cum Cash Flow
0
$ (36,936.00)
$ (36,936.00)
1
$ 5,720.00
$ (31,216.00)
2
$ 5,720.00
$ (25,496.00)
3
$ 5,720.00
$ (19,776.00)
4
$ 5,720.00
$ (14,056.00)
5
$ 5,720.00
$ (8,336.00)
6
$ 5,720.00
$ (2,616.00)
7
$ 5,720.00
$ 3,104.00
8
$ 9,370.00
$ 12,474.00
Payback Period = A +B/C
Where,
A = Last period with a negative cumulative cash flow = 6
B = Absolute value of a cumulative cash flow at the end of the period A = $ 2,616
C = Total cash flow during the period after A = $ 5,720
Discounted Payback Period = 6 +?$ (2,616) ?/$ 5,720
= 6 + $ 2,616/$ 5,720
= 6 + 0.4573427
= 6.4573427 or 6.46 years
2.
Annual depreciation = (Initial cost – salvage value)/useful life
= (Purchased cost + installation cost + freight cost) – salvage value/ useful life
= [($ 31,990 + $ 4,136 + $ 810)-$ 3,650]/8
= ($ 36,936 - $ 3,650)/8
= $ 33,286/8 = $ 4,160.75
Annual rate of return = Average Annual Profit/Average Investment
= (Annual profit – depreciation)/ (Initial investment + salvage value)/2
= ($ 5,720 - $ 4,160.75)/ ($ 36,936 + $ 3,650)/2
= $ 1,559.25/ ($40586/2)
= $ 1,559.25/$ 20,293
= 0.076837 or 7.7 %
Year
Cash Flow
‘Cum Cash Flow
0
$ (36,936.00)
$ (36,936.00)
1
$ 5,720.00
$ (31,216.00)
2
$ 5,720.00
$ (25,496.00)
3
$ 5,720.00
$ (19,776.00)
4
$ 5,720.00
$ (14,056.00)
5
$ 5,720.00
$ (8,336.00)
6
$ 5,720.00
$ (2,616.00)
7
$ 5,720.00
$ 3,104.00
8
$ 9,370.00
$ 12,474.00