Question

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. The longer a project's payback period, the more desirable the project is normally considered to be by this criterion. b. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. c. If a project's payback is positive, then the project should be rejected because it must have a negative NPV. d. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. e. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.

Answer 1

The correct statement is

b.One drawback is that the method does not account for time value of money

Payback period is the period in which the investment is recovered.

It does not consider the cash flows after payback period and neither it takes into account the time value of money

The projects with shorter payback period are acceptable

Discounted payback method considers the time value of money but not cash flows after payback period