Brady Service Center just purchased an automobile hoist for $31,640. The hoist h
ID: 2467577 • Letter: B
Question
Brady Service Center just purchased an automobile hoist for $31,640. The hoist has an 8-year life and an estimated salvage value of $3,280. Installation costs and freight charges were $4,101 and $850, 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 6 extra mufflers per week. Each muffler sells for $72 installed. The cost of a muffler is $40, and the labor cost to install a muffler is $15.
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.)
Brady Service Center just purchased an automobile hoist for $31,640. The hoist has an 8-year life and an estimated salvage value of $3,280. Installation costs and freight charges were $4,101 and $850, 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 6 extra mufflers per week. Each muffler sells for $72 installed. The cost of a muffler is $40, and the labor cost to install a muffler is $15.
Explanation / Answer
incremental cash flows: 6 per week * 52 weeks per year * (72 - 40 - 15) = 5,304 per year
begin book: 31,640 + 4,101 + 850 = $36,591
depreciation per year: (36,591 - 3,280) / 8 = 4,163.88
Assuming no taxes...
CF = Cash Flow
CF0 = (36,591)
CFs 1-7: 5,304
CF8: 5,304 + 3,280 = 8,584
total return: (5,304*7) + 8,584 = 45,712
annualized return: (1 + 45,712/36,591)^1/8 - 1 = 0.1066 , or about 10.66%
payback period:
after 6 years: 36,591 / 5304 = 6.9 Years