Question

Which of the following statements about the "payback period" is true? The payback period fails to...

Which of the following statements about the "payback period" is true?

The payback period fails to produce an objective decision to accept or reject an individual project.

The payback period considers the time value of money.

The payback period uses discounted cash-flow techniques.

The payback period considers cash flows after the payback has been reached.
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Answer #1

The statement that is true about 'payback period' is that :-

Payback period fails to produce an objective decision to accept or reject an individual project.

Explanation :-

In case of an individual project , the payback period only gives you the time in which you can recover your investment but , you do not have a cut off payback time so as to accept or reject the project . In case of mutually exclusive project , the project with shorter payback period is accepted .

So, in case of independent project, payback period fails to produce an objective decision.

Explanation for rejection of other points :-

Payback period does not consider the time value of money , it does not use discounted cash flow techniques and it does not consider the cash flow generated after payback has reached.

So, the other points given about payback period is false.

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