Question

When using the payback method, any cash flows for a project that occur after the payback period are not considered in computing the payback period for that project.

a. True
b. False

Answer 1

The payback method does not consider cash flows occurring after the payback period for a project.

Step-by-step explanation:

The statement provided in the question is True. When using the payback method, only the cash flows that occur within the payback period are considered. Any cash flows that occur after the payback period are not taken into account in computing the payback period for that project.

For example, let's say a project has an initial investment of $10,000 and generates cash flows of $2,000 per year. If the payback period is set at 5 years, only the cash flows occurring in the first 5 years, totaling $10,000, would be considered. Any cash flows occurring in the 6th year and beyond would be disregarded.