Question

Which of the statements below is TRUE of the payback period method?

(A) It ignores the cash flow after the initial outflow has been recovered.
(B) It is biased against projects with early-term payouts.
(C) It incorporates time-value-of-money principles.
(D) It focuses on cash flows after the initial outflow has been recovered.

Answer 1

The payback period method ignores cash flows after the initial outflow has been recovered. Option (A)

Step-by-step explanation:

The correct statement about the payback period method is It ignores the cash flow after the initial outflow has been recovered. The payback period is a measure used in financial decision-making to determine how long it takes for an investment to recover its initial cost. It focuses on the time it takes for the cash inflows to equal the initial cash outflow, without considering any cash flows that occur after the payback period. For example, if an investment costs $10,000 and generates $2,000 in cash inflows per year, the payback period would be 5 years.