Brady Service Center just purchased an automobile hoist for $33,480. The hoist h

ID: 2473494 • Letter: B

Question

Brady Service Center just purchased an automobile hoist for $33,480. The hoist has an 8-year life and an estimated salvage value of $3,210. Installation costs and freight charges were $3,945 and $740, 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 $74 installed. The cost of a muffler is $40, and the labor cost to install a muffler is $14.

Cash payback period ____________ years

Explanation / Answer

Calculation of Payback Period:

Purchase cost of hoist

$ 33,480

Add: Installation costs and freight charges

$ 3,945

Add: Freight charges

$ 740

Total Initial cash out flow (A)

$ 38,165

Annual Sales Revenue = (6 Mufflers* $74 *52 weeks)

$ 23,088

Less: Cost of mufflers =(6 Mufflers* $40 *52 weeks)

$ (12,480)

Less: Cost of labor cost =(6 Mufflers* $14 *52 weeks)

$ (4,368)

Annual Cash Inflows (B)

$ 6,240

Payback Period (Years) = A/B

6.12