Question

i) (TRUE / FALSE) Money spent for estimating the alternatives and gathering estimates for a project is always sunk cost İİ) ( TRUE / FALSE ) A shorter payback period can be interpreted as: the risk is lower than one with longer payback period. iii) (TRUE/ FALSE) Payback period is a popular measure of a project's worthiness, but does not produce accurate information.

Answer 1

1) The correct answer is True. Money spent for estimating the alternatives and gathering estimates for a project is always a sunk costs. These costs cannot be recovered.

2) The correct answer is False. A shorter payback period means that faster the cost of the investment can be recovered.

3) The correct answer is True. Payback period is a measure of project's worthiness and it does not produce accurate information as the payback period does not take into account the time value of money.

Answer 2

ANSWERS :

I). TRUE

Money spent on estimating and data collection are sunk cost as it is already spent whether project is taken up or not.

ii) TRUE

Short payback period means less uncertainty of future cash flows and therefore less risky.

iii) TRUE 

Payback period is popular to give idea of how much time the project takes to recover the invested cost. However, it is not accurate as it ignores cash flows beyond payback period.