Which of the following statements about the payback period evaluation technique is true?
A)Since cash flows received in the future are less certain than cash flows received today, the payback period technique takes risk into consideration.
B)The payback period evaluation technique will always lead to the same decision as the net present value technique if the post-payback duration is zero.
C)The payback period technique favors investments that return large cash flows in the initial years of the investment's life.
D)Both A and C are true statements.

Question

Quizplus · Accepted Answer

The payback period technique favors investments that return large cash flows in the initial years of the investment's life, without considering the time value of money or the cash flows beyond the payback period. As a result, it may lead to incorrect investment decisions. Option A is incorrect because the payback period technique does not take risk into consideration. Option B is incorrect because the net present value technique and the payback period technique can lead to different investment decisions, especially when cash flows are uneven. The payback period technique favors investments that return large cash flows in the initial years of the investment's life. This can result in overlooking investments that have a longer payback period but greater overall returns. Therefore, the payback period evaluation technique is not a reliable method for making investment decisions.

Which of the Following Statements About the Payback Period Evaluation