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

Question

Quizplus · Accepted Answer

The regular payback method only considers the time it takes to recoup the initial investment and does not account for any cash flows beyond that point. This means it ignores the time value of money and future cash flows, which can lead to incorrect investment decisions. Therefore, statement A is correct.

Statement B is incorrect because payback and NPV are two different methods of evaluating investments. A project with a positive payback may still have a negative NPV, meaning it would not be a good investment.

Statement C is partially correct. The discounted payback method does consider the time value of money, but it still ignores cash flows beyond the payback period.

Statement D is incorrect because the discounted payback method specifically addresses the time value of money by discounting future cash flows back to their present value.

Statement E is incorrect because a shorter payback period is generally considered more desirable as it indicates a quicker return on investment.

Which of the Following Statements Is CORRECT