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The management of a firm wishes to accept projects with quick recovery of investments; wishes to...

  1. The management of a firm wishes to accept projects with quick recovery of investments; wishes to accept projects with a high degree of liquidity; wishes to avoid the higher forecasting error associated with cash flows a long way into the future; wishes to avoid projects that require a large amount of R&D investments; and so on. The firm would be justified in using the _____ to evaluate its projects.
  1. internal rate of return (IRR)
  2. net present value (NPV)
  3. average accounting return (AAR)
  4. payback method
  5. profitability index (PI)
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Answer #1

Ans payback method

The management of a firm wishes to accept projects with quick recovery of investments; wishes to accept projects with a high degree of liquidity; wishes to avoid the higher forecasting error associated with cash flows a long way into the future; wishes to avoid projects that require a large amount of R&D investments; and so on. The firm would be justified in using the payback method to evaluate its projects.

Payback method refers to the amount taken by a project to cover its inital cost. It is a simple method to decide whether to accept the project or not.

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