Question 17.16: Your company is looking at purchasing a front-end loader at ...
Your company is looking at purchasing a front-end loader at a cost of $120,000. The loader can be billed out at $95.00 per hour. It costs $30.00 per hour to operate the front-end loader and $25.00 per hour for the operator. The useful life of the equipment is five years.
Using 1,200 billable hours per year, determine the payback period without interest for the front-end loader. Does the front-end loader generate enough revenue to recover the initial cost?
The hourly profit on the loader equals the billing rate less the operation cost and the cost of the operator, and is calculated as follows:
\text { Hourly Profit }=\$ 95.00 / hr -\$ 30.00 / hr -\$ 25.00 / hr
\text { Hourly Profit }=\$ 40.00 / hr
The annual profit on the loader equals the hourly profit times the number of billable hours per year and is calculated as follows:
\text { Annual Profit }=(\$ 40.00 / hr )(1,200 hr / yr )=\$ 48,000 / yr
The payback period ( n’ ) equals the number of years it takes to recover the initial capital outlay and is calculated as follows:
n^{\prime}=\frac{\text { Purchase Price }}{\text { Annual Profit }}=\frac{\$ 120,000}{\$ 48,000 / y r }=2.5 yr
The payback period for the investment is three years because the initial cost is paid back during the third year. Because the payback period is less than the five-year useful life of the loader, the purchase of the loader will generate enough revenue to recover the initial costs, the operating costs, and the cost of the operator.