Exercise 26-9 Legend Service Center just purchased an automobile hoist for $34,4
ID: 2578171 • Letter: E
Question
Exercise 26-9 Legend Service Center just purchased an automobile hoist for $34,400. The hoist has an 8-year life and an estimated salvage value of $3,960 Installation costs and freight charges were $4,020 and $840, 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 $40, and the labor cost to install a muffler is $13. ia Compute the cash payback period for the new hoist. (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period lii) Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e.g. 10.5.) years Annual rate of returnExplanation / Answer
a) Calculate cash payback period :
Initial cost = (34400+4020+840) = 39260
Cash flow = (76-40-13)*6*52 = 7176
Payback period = Initial investment/annual cash flow
= 39260/7176
Payback period = 5.47 years
Annual rate of return :
Net income = 7176-(39260-3960/8) = 2763.50
Annual rate of return = 2763.50*100/39260 = 7.0%
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