Brady Service Center just purchased an automobile hoist for $33,260. The hoist h
ID: 2487920 • Letter: B
Question
Brady Service Center just purchased an automobile hoist for $33,260. The hoist has an 8-year life and an estimated salvage value of $3,790. Installation costs and freight charges were $3,826 and $780, 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 $36, and the labor cost to install a muffler is $14. Your answer is correct. Compute the cash payback period for the new hoist. Cash payback period Compute the annual rate of return for the new hoist. annual rate of retumExplanation / Answer
Beginning book Value: 33,260+ 3,826 + 780= 37,866
Salvage Value= $3,790
Profit from 1 muffer =Sales Price – Cost =72-(36+14) =$22
Profit for one week= 22 x 6=132
Profit for one year =132 x 52=$6,864
Year
CashFlow
Cum Cash Flow
-
(37,866)
(37,866)
1
6,864
(31,002)
2
6,864
(24,138)
3
6,864
(17,274)
4
6,864
(10,410)
5
6,864
(3,546)
6
6,864
3,318
7
6,864
10,182
8
10,654
20,836
Cash payback period= 5 +3,546/6,864
=5 +0.52 years
=5.52 years
CF = Cash Flow
CF0 = (37,866)
CFs 1-7 = $6,864
CF5: 6,864 + 3,790 = 10,654 (including Salvage Value)
total return: (6,864 x 7) + 10,654= 58,702
Annual rate of return: (Principal + gain )/Principal ^ (1/no of years)
= (58,702+37,866/37,866)^1/8
= (96,568/37,866 ) ^ 1/8- 1
= 2.550256166 ^1/8-1
= 1.124146663 -1
= 0.124146663
=12.41%
Year
CashFlow
Cum Cash Flow
-
(37,866)
(37,866)
1
6,864
(31,002)
2
6,864
(24,138)
3
6,864
(17,274)
4
6,864
(10,410)
5
6,864
(3,546)
6
6,864
3,318
7
6,864
10,182
8
10,654
20,836
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