The discounted payback rule may cause: I.some positive net present value projects to be rejected.
II)the most liquid projects to be rejected in favor of less liquid projects.
III)projects to be incorrectly accepted due to ignoring the time value of money.
IV)some projects with negative net present values to be accepted.
A)(I) correct only.
B)(II) correct only.
C)(III) correct only.
D)(IV) correct only.
E)(I) and (IV) correct only.

Question

Quizplus · Accepted Answer

The discounted payback rule can lead to the rejection of positive net present value (NPV) projects if their cash flows come later in their life, making it harder to recover the initial investment quickly when discounted. It can also lead to the acceptance of projects with negative NPVs if their early cash flows are sufficient to recover the initial investment within the payback period, despite the total discounted cash flows being less than the initial investment.

The Discounted Payback Rule May Cause: I