Asked by Rafael Sanchez on Jul 28, 2024
Verified
Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. 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. The payback period for the auto is:
A) 1.8 years.
B) 3.0 years.
C) 2.0 years.
D) 1.2 years.
Payback Period
The duration of time it takes to recoup the cost of an investment.
Straight-Line Method
A depreciation method that allocates the cost of an asset evenly over its useful life.
Gross Revenues
The total amount of sales revenue generated by a company before any deductions are made for returns, allowances, and discounts.
- Establish and illuminate the period of capital return for investments.
- Learn about the effect of salvage value and depreciation on the profitability of investment endeavors.
Verified Answer
MJ
Michelle JiangAug 01, 2024
Final Answer :
B
Explanation :
The annual net cash inflows from the auto can be calculated as follows:
Gross revenue increase: $5,000
Less: Cost of prescriptions: $2,000
Net cash inflow: $3,000
Using the straight-line method, the annual depreciation of the auto can be calculated as follows:
($9,000 - $3,000) / 6 years = $1,000 per year
The payback period can be calculated by dividing the initial cost of the auto by the annual net cash inflow:
$9,000 / $3,000 = 3 years.
Therefore, the correct answer is B) 3.0 years.
Gross revenue increase: $5,000
Less: Cost of prescriptions: $2,000
Net cash inflow: $3,000
Using the straight-line method, the annual depreciation of the auto can be calculated as follows:
($9,000 - $3,000) / 6 years = $1,000 per year
The payback period can be calculated by dividing the initial cost of the auto by the annual net cash inflow:
$9,000 / $3,000 = 3 years.
Therefore, the correct answer is B) 3.0 years.
Learning Objectives
- Establish and illuminate the period of capital return for investments.
- Learn about the effect of salvage value and depreciation on the profitability of investment endeavors.