Question

Exercise 12-9

Legend Service Center just purchased an automobile hoist for $34,100. The hoist has an 8-year life and an estimated salvage value of $3,800. Installation costs and freight charges were $4,100 and $800, respectively. Legend uses straight-line depreciation.

The new hoist will be used to replace mufflers and tires on automobiles. Legend estimates that the new hoist will enable his mechanics to replace 5 extra mufflers per week. Each muffler sells for $74 installed. The cost of a muffler is $35, and the labor cost to install a muffler is $14.

(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. 10.52%.)

Annual rate of return

%

Answer 1

Answer : (a.) Computation of Cash Payback Period :

There are 52 weeks in a year.

Purchase Price of Automobile Hoist = $34100 + 4100 + 800 = 39,000

Salvage Value = $3800

Depreciation per year = (39000 - 3800) / 8 = 4,400 (Non Cash Item)

Below is the table showing Valculation of Annual Cashflow :

	Workings	Amount
Sale of Muffler (A)	5Muffler * 52 weeks* $74	19,240
Cost of Muffler (B)	5Muffler * 52 weeks* $35	(9100)
Labour Cost (C)	5Muffler * 52 weeks* $14	(3640)
Annual Cash Flows	(A) - (B) - (C)	6500

Cash Pay back Period = Investment / Annual Cash Flow

= 39,000 / 6500

= 6 years

(b.) Computation of Annual Rate of Return

Annual Rate of Return = Net Income / Average Investment

= (Annual Cash Flow - Depreciation) / [ Cost Price + Salvage Value ) / 2 ]

= (6500 - 4400) / [ (39000 + 3800) / 2]

= 2100 / 21400

= 0.0981 or 9.81%