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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.

Respuesta :

TomShelby

Answer:

not profitable

payback period > project life

Explanation:

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

[tex]\frac{investment}{cash \: flow} = $payback period[/tex]

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.

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