KQuestion 4 (of 10) (ignore income taxes in this problem) Buy-Rite Pharmacy has

Question

KQuestion 4 (of 10) (ignore income taxes in this problem) Buy-Rite Pharmacy has purchased a small auto for delivering The auto was purchased for $34 000 and will have a 6-year usefuf life and a $4.600 salvage twhich the phormacy has never done before) should increase gross revenues value by at least $32 600 per year. The cost of these prescriptions to the pharmacy will be about $26.200 per year. The pharmacy depreciates all assets using the straight-ine method The payback pertod for the auto is O 53 years O 41 years O 6 years

Explanation / Answer

A / 1 B C D E 2 Calculation of payback period 3 Total initial investment/Cash outflow $34,000 4 Residual Value $4,600 5 Useful Life in Years                       6 6 Increase in Gross Revenues $32,600 7 Less: Cost $26,200 8 Net incremental cash inflow per year $6,400 9 10 Year Cashflows Cumulative Cashflows 11 0 ($34,000) ($34,000) 12 1 $6,400 ($27,600) 13 2 $6,400 ($21,200) 14 3 $6,400 ($14,800) 15 4 $6,400 ($8,400) 16 5 $6,400 ($2,000) 17 6 $11,000 $9,000 (6400+4600) 18 19 From the above table the cumulative cash flows are positive in 6th year, and 6th year investment to recover is $2000. 20 Therefore: 21 Yr1+Yr2+Yr3+Yr4+Yr5+(Yr6/$2000)            0.18 =2000/11000 22 23 Hence 5 Years + 0.18 of 6th Year ie.0.18 of 12 mths                 2.18 =12*C21 24 Hence the answer is % 5 Yr and 3 Mths.

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