Question

Which of the following statements is true regarding the payback period?

A. the time value of money is considered when calculating the payback.
B. the payback analysis is more accurate than the net present value analysis.
C. the payback period is less accurate than the accounting rate of return.
D. the time value of money is not considered when calculating the payback.

Answer 1

The correct statement regarding the payback period is that the time value of money is considered when calculating the payback.

Step-by-step explanation:

The correct statement regarding the payback period is:

A. The time value of money is considered when calculating the payback.

The payback period is the time it takes for an investment to recover its initial cost. In calculating the payback period, the cash flows of the investment are considered, but the time value of money is not taken into account. This means that the payback period does not consider the fluctuation of the value of money over time.

For example, let's say you invest $10,000 in a project that generates a cash inflow of $2,000 per year for five years. The payback period would be 5 years because it takes 5 years for the cumulative cash inflows to equal the initial investment of $10,000.