A project has a payback period of 5 years and the firm employs a 10% cost of capital.Which of the following statements is correct concerning this project's discounted payback?
A) Discounted payback will exceed 5 years.
B) Discounted payback will be less than 5 years.
C) Discounted payback will decrease if the project's IRR exceeds 10%.
D) Discounted payback will increase if the project's IRR is less than 10%.

Question

Quizplus · Accepted Answer

Discounted payback will always be longer than regular payback, since it takes into account the time value of money. Therefore, the discounted payback period for this project is likely to be longer than 5 years. The IRR of the project does not affect the discounted payback period, since it only measures the project's rate of return, not the time it takes to recoup the initial investment.

A Project Has a Payback Period of 5 Years and the Firm