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 cut-off point.
D) varies the cut-off point with the interest rate.

Question

Quizplus · Accepted Answer

The payback period rule involves setting an arbitrary cutoff point for the time it takes for an investment to pay back its initial cost from its cash inflows. This cutoff point is not determined by any specific formula related to interest rates or depreciation but is chosen based on the investor's or company's preference for how quickly they want their investment to be recovered.

The Payback Period Rule