(Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small a

Question

(Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $30,000 and will have a 6-year useful life and a $4,200 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $32,200 per year. The cost of these prescriptions to the pharmacy will be about $25,400 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is closest to:

4.4 years

3.8 years

5 years

3.7 years

(Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $30,000 and will have a 6-year useful life and a $4,200 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $32,200 per year. The cost of these prescriptions to the pharmacy will be about $25,400 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is closest to:

Explanation / Answer

Benefit every year = 32200

Cost of prescriptions = 25400

Net benefit = 6800

Payback period = 30000/6800 i.e 4.4 years

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