Henry Co. is considering acquiring a manufacturing plant. The purchase price is $1,200,000. The owners believe the plant will generate net cash inflows of $325,000 annually. It will have to be replaced in six years. Use the payback method to determine whether Henry should purchase this plant. Round to one decimal place.
Henry should purchase the plant as the payback period is 3.7 years.
A capital budgeting technique shows the years required to recover the initial investment cost, known as the payback period.
Calculating payback period
Henry should adopt this plant since the payback period is shorter than the time it will take to replace it.
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