Legend Service Center just purchased an automobile hoist for $31,200. The hoist

Question

Legend Service Center just purchased an automobile hoist for $31,200. The hoist has an 8-year life and an estimated salvage value of $3,500. Installation costs and freight charges were $4,130 and $750, 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 6 extra mufflers per week. Each muffler sells for $76 installed. The cost of a muffler is $37, and the labor cost to install a muffler is $12.

Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e.g. 10.5.)

Explanation / Answer

Cost of hoist = 31,200+4,130+750 = $36,080

Average investment = (36,080+3,500)/2 = $19,790

Annual depreciation = (36,080 - 3,500)/8 = $4,072.5

No. of mufflers sold in a year = 4*52 = 208. Contribution margin per muffler = 76 - 37 - 12 = $27

Income = 208 mufflers*27 = $5,616

Annual net income = 5,616 (as computed above) - annual depreciation = 5616 - 4072.5 = $1,543.50

Thus average annual rate of return = annual net income/average investment = 1543.50/19790

= 7.8%

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