Answer:
a) 6.74 years
b) Annual rate of return = 3.6%
Explanation:
Given:
Purchasing cost of the automobile hoist = $ 34,300
Total life of the hoist = 8 years
salvage value of the hoist = $ 3,900
Installation cost of the hoist = $ 3,380
Freight charges = $ 880
Increase sales of muffler per week = 5
Selling price for muffler = $ 76
cost of a muffler = $40
labor cost to install a muffler = $14
a) cash payback period = ( initial investment) / ( Annual cash flow )
now,
Initial investment = cost of the hoist + Installation cost + Freight charges
or
Initial investment = $ 34,300 + $ 3,380 + $ 880 = $ 38,560
annual cash flow is calculated as:
= annual sales value of muffler - total material cost of muffler - labor cost of installing mufflers
= ( 5 × 52 weeks × $ 76 ) - ( 5 × 52 weeks × $ 40) - (5 × 52 weeks × $ 14)
= $ 19,760 - $ 10,400 - $ 3,640
or
Annual cash flow = $ 5,720
Hence,
Cash payback period = $ 38,560 / $ 5,720 = 6.74 years
b) The annual rate of return is given as:
= ( Net income ) / ( initial investment )
assuming the straight line method for depreciation,
thus,
Depreciation per year = ( Initial investment - salvage value) / Total useful life
= ( $ 38,560 - $ 3,900) / 8
or
Depreciation per year = $4,332.5
Thus,
The net income after depreciation = $ 5,720 - $ 4,332.5
or
Net income = $ 1,387.5
Hence,
Annual rate of return = $ 1,387.5 / $ 38,560
or
Annual rate of return = 3.6%
