Asked by matthew winter on Jul 21, 2024
Verified
(Ignore income taxes in this problem.)Bied's Pharmacy has purchased a small auto for delivery of prescriptions.The auto cost $28,000 and will be usable for seven years.Delivery of prescriptions (which the pharmacy has never done before)should increase revenues by at least $25,000 per year.The cost of these prescriptions will be about $18,000 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.
Straight-Line Method
A depreciation technique that allocates an equal amount of an asset's cost to each year of its useful life.
Payback Period
The length of time it takes to recover the initial investment cost through the accumulated cash flows from an investment.
Simple Rate
A term that could refer to a basic or straightforward interest rate, without compounding effects.
- Comprehend and calculate the payback period for investments.
- Understand and determine the simple rate of return (accounting rate of return) for various projects.
Verified Answer
RW
raywin witbooiJul 24, 2024
Final Answer :
a.Payback period = Investment required ÷ Annual net cash inflow
= $28,000 ÷ ($25,000 - $18,000)per year
= $28,000 ÷ $7,000 per year = 4 years
b.Simple rate of return = Annual incremental net operating income ÷ Initial investment
= [$25,000 - ($18,000 + $4,000)] ÷ $28,000 = 10.7% (rounded)
= $28,000 ÷ ($25,000 - $18,000)per year
= $28,000 ÷ $7,000 per year = 4 years
b.Simple rate of return = Annual incremental net operating income ÷ Initial investment
= [$25,000 - ($18,000 + $4,000)] ÷ $28,000 = 10.7% (rounded)
Learning Objectives
- Comprehend and calculate the payback period for investments.
- Understand and determine the simple rate of return (accounting rate of return) for various projects.