Exercise 24-9 Open Show Work Exercise 24-9 Legend Service Center just purchased
ID: 2586721 • Letter: E
Question
Exercise 24-9
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Exercise 24-9
Legend Service Center just purchased an automobile hoist for $32,900. The hoist has an 8-year life and an estimated salvage value of $3,640. Installation costs and freight charges were $4,140 and $830, 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 $73 installed. The cost of a muffler is $38, and the labor cost to install a muffler is $12.
(a)
Compute the cash payback period for the new hoist. (Round answer to 2 decimal places, e.g. 10.50.)
Cash payback period years
(b)
Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e.g. 10.5.)
Annual rate of return % Click if you would like to Show Work for this question:
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Explanation / Answer
Answer a Cash payback period = Capitalised cost of automobile hoist / Cash saving per year Capitalised cost of automobile hoist = Purchase cost + Installation cost + Freight cost = $32900 + $4140 + $830 = $37,870 Incremental net Cash revenue per year = Incremental net cash revenue per week * no.of weeks in a year Incremental net Cash revenue per year = ($73 - $38 - $12) * 6 mufflers * 52 weeks = $7176 Cash payback period = $37870 / $7176 = 5.28 years Answer b Annual rate of return = Annual incremental net income / Capitalised cost of automobile hoist Annual incremental net income = Incremental net cash revenue per year - Depreciation Annual incremental net income = $7176 - $4278.75 = $2897.25 Annual rate of return = $2897.25 / $37870 = 7.65% Working Depreciation per year using straight line method = (Cost - salvage value)/useful life Depreciation per year using straight line method = ($37870 - $3640)/8 years = $4278.75
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