Question

The main advantage of the payback rule is that it

a. is simple to use.
b. adjusts for uncertainty of early cash flows.
c. better accounts for salvage costs at the end of a project.
d. does not discount cash flows.

Answer 1

The main advantage of the payback rule is its simplicity and ease of use. The correct answer is option a.

Step-by-step explanation:

The main advantage of the payback rule is that it is simple to use. The payback period is a straightforward calculation that tells you how long it will take to recover your initial investment. For example, if you invest $1,000 and expect to receive $200 in cash flows every year.

The payback period would be 5 years because it would take 5 years to recoup the $1,000 investment through the $200 annual cash flows. Unlike other methods, the payback rule does not discount cash flows, which makes it easier to understand and apply.

However, it does have limitations, such as not considering the time value of money and not accounting for cash flows beyond the payback period. It provides a straightforward calculation to determine how long it will take to recoup an initial investment.