Exercise - Dryden Service Centre just purchased an automobile hoist for $18,600. The hoist has a five-year life and an estimated salvage value of $1,400. Installation costs and freight charges were $3,900 and $900, respectively. Dryden uses straight-line depreciation.
The new hoist will be used to replace mufflers and tires on automobiles. Dryden estimates that the new hoist will enable its mechanics to replace 5 extra mufflers per week. Each muffler sells for $75, installed. The cost of a muffler is $35, and the labour cost to install a muffler is $15.
(a) Calculate the payback period for the new hoist.
(b) Calculate the annual rate of return for the new hoist (round to one decimal).