Question

3. Which one of the following is not a problem of using the payback period?

• Firm cutoffs are subjective.
• Does not consider time value of money.
• Does not consider any required rate of return.
• Consider all of the project's cash flows.
• None of the above are problems of using the payback period.

4.  A firm is starting a new project that will cost $200,000. It is projected to last 5 years and to generate cash flows of $50,000, $70,000, $90,000, $50,000 and $30,000 from Years 1 through 5 respectively. If the discount rate is 10%, what is the payback period of this project? Round to the second decimal place. Type only numbers without any unit ($, %, etc.)

Answer 1

Answer : 3 . Correct option is Consider all of the project's cash flows.

Reason :

Payback period Does not consider time value of money , Does not consider any required rate of return,and Firm cutoffs are subjective are the problems of payback period.

But Consider all of the project's cash flows is not a problem of payback period.

Answer : 4 Calculation of Payback Period

Below is the table showing calculation of payback period :

Year	Cash Flows	Cumulative Cash Flows
1	50000	50000
2	70000	120000
3	90000	210000
4	50000	260000
5	30000	290000

Payback period

= Complete years + (initial Investment - Remaining cash flows) / Cash flow of the year to be recovered

=2 years + (200000 - 120000) / 90000

=2.89 years