Question

21.

The Payback period is the length of time required to recover the initial investment.

		you should use payback period to evaluating two mutually exclusive projects
		The Payback period considers risk of the project
		The Payback period treat $1,000 received in year 1 the same as the one received in year 3
		The Payback period treat $1,000 received in year 1 different than the one received in year 3

Answer 1

As given in the question, the payback period considers the risk of the project. As the time increases, uncertainities also increase. We can tell to some extent the expected ariables that may occur in the next one year, but we cant with the same amount of confidence, talk about something that might happen 2-3 years form now.

For this, given that risk is taken into account, a project that has a payback period of three years is more risky than a project that has a payback period of a year. Thus, they should be accounted for differently. As the projects are mutually exclusive, this makes a major difference in making a choice of which project to pick.

Thus, we should choose the option in which the payback period treats 1000$ received in a year differently from it received in 3 years.