Question

Concerning payback, which of the following statements is true?

a) Payback is no longer used since it ignores the time value of money.

b) Payback can only be used on simple projects since it cannot deal with cash flow.

c) Payback period varies inversely with the benefit-cost ratio: the shorter the payback period, the higher the benefit-cost.

d) Payback is only used for capital intensive projects.

Answer 1

Correct answer is option (a). Payback is no longer used since it ignores the time value of money.

Explanation;

As we know that payback period tell about the number of years in which initial investment will be recovered but it does not consider time value of money that is why payback period method is not used as trusted method of project evaluation.

NPV method is considered as highly reliable method of project evaluation because it helps in knowing true positive or negative net present value of prospective project.

Hence we can say that “Payback is no longer used since it ignores the time value of money.” Is correct statement.