Question

Which of the following statements is​ false?

A.The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV.
B.The payback rule is reliable because it considers the time value of money and depends on the cost of capital.
C.For most investment opportunities expenses occur initially and cash is received later.
D.Fifty percent of firms surveyed reported using the payback rule for making decisions.

Answer 1

The false statement is that the payback rule is reliable because it considers the time value of money and depends on the cost of capital; it does not consider these factors, unlike the NPV which is more accurate for assessing investments.

Step-by-step explanation:

The statement that is false is: 'The payback rule is reliable because it considers the time value of money and depends on the cost of capital.' This is not correct because the payback rule fundamentally does not take into account the time value of money; it simply calculates how long it takes for an investment to generate cash flows sufficient to recover the initial investment cost.

The payback rule is a simple tool that can be useful for quick assessments but is limited because it ignores the benefits that occur after the payback period and does not consider the time value of money, unlike more sophisticated methods like the calculation of net present value (NPV).

When comparing investment opportunities, businesses and investors often examine the present discounted value and the NPV to make informed decisions. These methods are more comprehensive as they consider both the timing of cash flows and the cost of capital, which is crucial for making sound financial decisions.

In the given options, statement B is false.