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

Question

(Ignore income taxes in this problem) Buy-Rite Pharmacy has purchased a small sport utility vehicle (SUV) for delivering prescriptions. The SUV was purchased for $40,000 and will have a 5-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 $60,000 (cash) per year. The cost of delivery to the pharmacy will be about $40,000 (excluding depreciation) per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is:

Explanation / Answer

Net annual cash flow = (60000-40000) = 20000 per year

Payback period = Initial investment/annual cash flow

                        = 40000/20000

Payback period = 2 years

so answer is c) 2.0 years

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