Question

Root Products is considering acquiring a manufacturing plant. The purchase price is $ 900,000. The owners believe the plant will generate net cash inflows of $ 300,000 annually. It will have to be replaced in eight years. To beâ profitable, theâ investment's payback period must occur before theâ investment's replacement date. Use the payback method to determine whether Root Products should purchase this plant.

First enter the formula, then calculate the payback period.

Answer 1

Payback period = amount invested / cash flows

$900,000 / $300,000 = 3 years

Root Products should purchase this plant because the payback period occurs before the replacement date.

Step-by-step explanation:

Payback period calculates the amount of time it takes to recover the amount invested in a project from its cumulative cash flows.

Payback period = amount invested / cash flows

$900,000 / $300,000 = 3 years

Root Products should purchase this plant because the payback period occurs before the replacement date.

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