Question

Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $32,000 and will have a 6-year useful life and a $4,400

salvage value. Delivering prescriptions (which the pharmacy has never done before) should Increase gross revenues by at least $32,400 per year. The cost of
these prescriptions to the pharmacy will be about $25,800 per year. The pharmacy depreciates all assets using the straight-line method. The payback perlod for
the auto is closest to (ignore income taxes): (Round your answer to 1 decimal place.)
Multiple Choice

Answer 1

It will take approximately 4.2 years.

Step-by-step explanation:

To calculate the payback period for the auto, we need to determine how many years it will take for the additional gross revenues from delivering prescriptions to cover the cost of the auto.

The initial cost of the auto is $32,000 and the salvage value is $4,400, so the depreciable cost is $27,600 ($32,000 - $4,400).

The additional gross revenues from delivering prescriptions are $32,400 per year, and the cost of these prescriptions to the pharmacy is $25,800 per year, so the net additional revenue per year is $6,600 ($32,400 - $25,800).

To cover the depreciable cost of $27,600, it will take approximately 4.2 years ($27,600 ÷ $6,600 = 4.18).

Therefore, the payback period for the auto is closest to 4.2 years.