Question

Products is considering acquiring a manufacturing plant. The purchase price is $1,860,000. The owners believe the plant will generate net cash inflows of $310,000 annually. It will have to be replaced in five years. To be​ profitable, the investment payback must occur before the​ investment's replacement date. Use the payback method to determine whether Cato Products should purchase this plant.

Answer 1

not profitable

payback period > project life

Step-by-step explanation:

to determinatethe payback we will divide the investment amount over the cashflow per year generated for the project:

`(investment)/(cash \: flow) = $payback period`

1,860,000 / 310,000 = 6 years

As the cash flow are generated per year this give us how many years the project needs to continue to payback the investment. If we use a monthly income the answer will be expressed in month.

Because, the project life is 5 years and payback occurs at 6 years the project is not profitable. The company do not recover his initial investment.