Question

What is the result of discounting projected cash flows on a project's payback period. A. The payback period will be increased B. There is no effect on the payback period. C. It depends on the discount rate D. The payback period will be decreased

Answer 1

Answer: Option A

Explanation: Payback period is the time period it takes for an investment to cover its initial investment in the form of future cash flows. It is computed as follows :-

`payback\:period=(Initial\:investment)/(Periodic\:cash\:flows)`

If we discount back the cash flows, it will result in lowering its value. As the denominator in a equation decreases the value of result increaes.

Hence, option A is correct.