Alameda Service Center just purchased an automobile hoist for $15,300. The hoist

Question

Alameda Service Center just purchased an automobile hoist for $15,300. The hoist has a 5-year life and an estimated salvage value of $1,199. Installation costs were $3,080, and freight charges were $890. Alameda uses straight-line depreciation.

The new hoist will be used to replace mufflers and tires on automobiles. Alameda 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 $28, and the labor cost to install a muffler is $12.

(a) Compute the payback period for the new hoist. (Round answer to 1 decimal places, e.g. 1.5.)

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Cost of Hoist = 15300 + 3080 + 890 = 19270

Net Annual Cash Flows:

Number of Extra Mufflers = 6*52 weeks = 312

Contribution Margin Per Muffler = 80 - 28 - 12 = 40

Total Net Annual Cash Inflows = 312*40 = 12480

Payback Period = 19270/12480 = 1.54 or 1.5

Part B:

Average Investment = (19270 + 1199)/2 = 10234.5

Annual Depreciation = (19270 - 1199)/5 = 3614.2

Annual Net Income = 12480 - 3614.2 = 8865.8

Annual Rate of Return = 8865.8/10234.5 = 86.62 or 86.6%

Thanks.

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