Question

A firm seeks to accept projects with a high degree of liquidity, avoid the higher forecasting error associated with cash flows occurring in the distant future, and avoid projects that require a large amount of research and development expenses. This firm may be justified in using the ___________to evaluate its projects.

Answer 1

Answer: Payback rule

Explanation: As per the pay back rule, the project which earns its initial investment more quickly is considered to be acceptable and profitable.

In the given case, the company is expecting a project which do not affect liquidity and does not take too much cost on research for the coming future. Thus, a project with a shorter time period of recovery of initial investment will be suitable fro them.

Hence the company should use payback rule to evaluate its product.