Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $9,000 and will have a six-year useful life and a $3,000 salvage value.Delivering prescriptions (which the pharmacy has never done before)should increase gross revenues by at least $5,000 per year.The cost of these prescriptions to the pharmacy will be about $2,000 per year.The pharmacy depreciates all assets using the straight-line method.What is the payback period for the auto? (Ignore income taxes in this problem.)

Question

Quizplus · Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflow. The initial investment is $9,000. The annual net cash inflow is calculated as the increase in gross revenues ($5,000) minus the cost of prescriptions ($2,000) minus the annual depreciation expense. The annual depreciation expense is ($9,000 - $3,000) / 6 = $1,000. Therefore, the annual net cash inflow is $5,000 - $2,000 - $1,000 = $2,000. The payback period is $9,000 / $2,000 = 4.5 years. However, since this option is not available, it seems there was a mistake in my calculation or interpretation of the options provided. Re-evaluating the calculation without considering depreciation (as it's a non-cash expense and should not reduce the cash inflow for payback period calculation), the annual net cash inflow should be $5,000 - $2,000 = $3,000. Thus, the correct payback period is $9,000 / $3,000 = 3.0 years.

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