Question

What is the payback method of analysis?

1. discount cash flows
2 .ignores the initial cost
3. has a timing basis
4 .applies an industry standard recoupment period
5. considers all project cash flows

Answer 1

The payback method of analysis is a technique used to evaluate the profitability of an investment by determining how long it takes to recover the initial cost of the investment. It calculates the payback period by dividing the initial investment by the expected annual cash inflows. The payback method considers all project cash flows, has a timing basis, applies an industry standard recoupment period, and ignores the initial cost.

Step-by-step explanation:

The payback method of analysis is a technique used to evaluate the profitability of an investment by determining how long it takes to recover the initial cost of the investment. It calculates the payback period by dividing the initial investment by the expected annual cash inflows. The payback method has the following characteristics:

1. Discount cash flows: The payback method does not discount future cash flows. It considers only the timing of cash flows.
2. Considers all project cash flows: The payback method takes into account all cash inflows and outflows related to the project.
3. Has a timing basis: The payback period is based on the time it takes for the cash inflows to equal the initial investment.
4. Applies an industry standard recoupment period: The acceptability of the payback period depends on the industry and its specific requirements.
5. Ignores the initial cost: The payback method does not consider the time value of money or the cost of capital. It focuses solely on the time it takes to recoup the initial investment.