Carleton Service Center just purchased an automobile hoist for $15,000.The hoist

Question

Carleton Service Center just purchased an automobile hoist for $15,000.The hoist has a 5-year life and an estimated salvage value of $1,080. Installation costs were $2,900, and freight charges were $820. Carleton uses straight-line depreciation. The new hoist will be used to replace mufflers and tires on automobiles. Carleton estimates that the new hoist will enable his mechanics to replace four extra mufflers per week. Each muffler sells for $65 installed. The cost of a muffler is $35, and the labor cost to install a muffler is $10.

Explanation / Answer

Incremental muflers = 4/ week *52 weeks = 208 muflers

Incremental Revenue per mufler = $65 - 35 - 10 = $20

Incremental revenue per year = 208 * $20 = $4160

Payback Period = Initial Investment / Annual Cash Flow = (15000 + 820 + 2900)/ 4160 = 18720/4900 = 4.5 years

Annual Rate of return = Net Income/ Initial Investment * 100 = 4160 / 18720 * 100 = 22.22%

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