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#4. Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost $30,000 and...

#4. Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost $30,000 and will be usable for five years. Delivery of prescriptions (which the pharmacy has never done before) should increase revenues by at least $29,000 per year. The cost of these prescriptions will be about $21,000 per year. The pharmacy depreciates all assets by the straight-line method. Required:

a. Compute the payback period on the new auto.

b. Compute the simple rate of return of the new auto.

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Homework Answers

Answer #1

Solution:

Investment in Auto = $30,000

Annual cash inflows = $29,000 - $21,000 = $8,000

Annual depreciation on Auto = $30,000 / 5 = $6,000

Annual income from delivery of prescriptions = $8,000 - $6,000 = $2,000

Note: It is assumed that cost of prescription given is cash cost excluding depreciation.

Payback period = Initial investment / Annual cash inflows = $30,000 / $8,000 = 3.75 years

Simple rate of return = Annual income / Initial investment = $2,000 / $30,000 = 6.67%

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