Which of the following statements is CORRECT?
A) The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.
B) One drawback of the regular payback is that this method does not take account of cash flows beyond the payback period.
C) If a project's payback is positive, then the project should be accepted because it must have a positive NPV.
D) The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

Question

Quizplus · Accepted Answer

The regular payback method is often criticized for not taking into account any cash flows occurring beyond the payback period. This ignores the time value of money, which is why the discounted payback method is often preferred. Option A is incorrect because a shorter payback period is considered more desirable as it helps in recovering the initial investment in a shorter period. Option C is incorrect because the payback period does not take the time value of money into account, so positive payback does not necessarily mean a positive NPV. Option D is incorrect because the statement is only partially correct. The discounted payback method overcomes the problem of ignoring cash flows beyond the payback period, but it still suffers from some limitations.

Which of the Following Statements Is CORRECT