Question

Which one is an incorrect statement?

Group of answer choices

a.Payback period is shorter for projects with positive NPVs than negative NPVs

b.Cost only projects have no payback

c.Discounted payback period is always longer than payback period

d.Payback method can rank projects differently than NPV method

Answer 1

a.Payback period is shorter for projects with positive NPVs than negative NPVs

This statement is incorrect. The payback period for a particular project depends on the cash inflow and outflows, which is unique for every project. Hence, the payback period cannot be estimated by knowing the sign of NPV.

b is correct as payback period is the time taken for the intial investment to be recovered. In a cost only project, there is not cash inflow, leading to no payback. c is correct as discounted payback period used discounted cashflows, hence the cash inflows are always lesser in present value. d is correct as payback period does not consider the discounted cash flows, where as NPV does. Hence, they both can lead to different ranks.