A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?
A) The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted.
B) The cash flow in Year 3 is ignored.
C) The project's cash flow in Year 3 is discounted by a factor of (1 + R)³.
D) The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.
E) The project is acceptable whenever the payback period exceeds three years.

Question

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? 
A) The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. 
B) The cash flow in Year 3 is ignored. 
C) The project's cash flow in Year 3 is discounted by a factor of (1 + R)³.
D) The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. 
E) The project is acceptable whenever the payback period exceeds three years.

Quizplus · Accepted Answer

The payback period analysis does not discount future cash flows, meaning all cash flows within the payback period are valued equally regardless of when they occur. This means that cash flow in Year 2 is indeed valued just as highly as the cash flow in Year 1, as the analysis simply sums up the cash flows until the initial investment is recovered.

A Project Has a Required Payback Period of Three Years