The payback period rule:
A) determines a cutoff point so that all projects accepted by the NPV rule will be accepted by
the payback period rule.
B) determines a cutoff point so that depreciation is just equal to positive cash ﬂows in the
payback year.
C) requires an arbitrary choice of a cutoff point.
D) varies the cutoff point with the interest rate.
E) requires two cut-off points to control cash ﬂows in each period.

Question

Quizplus · Accepted Answer

The payback period rule requires an arbitrary choice of a cutoff point, which can vary based on subjective factors such as managerial preferences or risk aversion. Unlike the NPV rule, there is no objective standard for determining the acceptability of a project based on the payback period, which makes it a less reliable decision-making tool.

The Payback Period Rule