Brady Service Center just purchased an automobile hoist for

Brady Service Center just purchased an automobile hoist for $35,020. The hoist has an 8-year life and an estimated salvage value of $3,340. Installation costs and freight charges were $3,353 and $810, 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 7 extra mufflers per week. Each muffler sells for $72 installed. The cost of a muffler is $38, and the labor cost to install a muffler is $13.

Brady Service Center just purchased an automobile hoist for $35,020. The hoist has an 8-year life and an estimated salvage value of $3,340. Installation costs and freight charges were $3,353 and $810, 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 7 extra mufflers per week. Each muffler sells for $72 installed. The cost of a muffler is $38, and the labor cost to install a muffler is $13.

Solution

Solution 1:

Total cost of automobile hoist = $35,020 + $3,353 + $810 = $39,183

Annual Incremental revenue from automobile hoist = 7 * $72 * 52 = $26,208

Annual incremental cost = 7 * ($38 + $13) * 52 = $18,564

Annual incremental cash inflows = $26,208 - $18,564 = $7,644

Cash payback period = Initial investment / Annual cash inflows = $39,183 / $7,644 = 5.13 Years

Annual income from new hoist = Annual incremenal cash flows - Depreciation

Annual depreciation = ($39,183 - $3,340) / 8 = $4,480

Annual income from new hoist = $7,644 - $4,480 = $3,164

Annual rate of return = Average anual income / Average investment

Average investment = (Initial investment + Salvage value)/2

= ($39,183 + $3,340) / 2 = $21,261.50

Annual rate of return = $3,164 / $21,261.50 = 14.9%