Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $24,000 and will have a 6-year useful life and a $6,000 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $28,000 per year. The cost of these prescriptions to the pharmacy will be about $22,000 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is closest to (Ignore income taxes.):

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflow. The initial investment is $24,000. The annual net cash inflow is the increase in gross revenues ($28,000) minus the cost of prescriptions ($22,000), which equals $6,000. Therefore, the payback period is $24,000 / $6,000 = 4 years.

Buy-Rite Pharmacy Has Purchased a Small Auto for Delivering Prescriptions