Which of the following statements is CORRECT?
A) The discounted payback method recognizes all cash flows over a project's life, and it also adjusts these cash flows to account for the time value of money.
B) The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
C) The regular payback is useful as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.
D) The regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect.
E) The regular payback method recognizes all cash flows over a project's life.

Question

Quizplus · Accepted Answer

The regular payback method is still widely used by many companies as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project. However, it does not consider cash flows beyond the payback year, which is a major disadvantage. The discounted payback method overcomes this defect by recognizing all cash flows over a project's life and adjusting these cash flows to account for the time value of money. Therefore, statement A and D are incorrect. Statement B is also incorrect as the regular payback method is still used by many companies today. Statement E is incorrect as the regular payback method does not consider the time value of money.

Which of the Following Statements Is CORRECT