If project A has a lower payback period than project B, this may indicate that project A may have a
A) lower NPV and be less profitable.
B) higher NPV and be less profitable.
C) higher NPV and be more profitable.
D) lower NPV and be more profitable.

Question

Quizplus · Accepted Answer

A lower payback period means that the project generates cash flows earlier, which is an advantage. However, it doesn't provide any indication of the magnitude of the cash flows or the time value of money. The NPV considers both factors and is a better measure of profitability. Therefore, it's possible that project A has a higher NPV and is more profitable, even if its payback period is shorter than project B's.

If Project a Has a Lower Payback Period Than Project