Final answer:
The statement that a financial manager should always choose the investment with the shorter payback period is false. Investment decisions should consider multiple factors such as rate of return, long-term profitability, and investment risk, in addition to the payback period.
Step-by-step explanation:
When choosing between two potential investment projects, the financial manager should not always choose the project with the shorter payback period. This statement is false because the decision involves multiple factors beyond just the payback period. While the payback period - the time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment - is an important measure of risk, especially in terms of how quickly money can be recouped, it is not the sole criterion for investment decisions.
Financial managers must also consider other important factors such as the overall rate of return, the long-term profitability of the project, and the risks associated with each investment opportunity. Sometimes a project with a longer payback period may offer a higher rate of return or fit better with the company's strategic objectives, thus making it a more suitable investment in the long term. Another investment might have a short payback period but a low rate of return, which could be less desirable for a firm looking to maximize its investments' growth potential.
Therefore, while payback period is an important metric, it should be weighed against other crucial factors like potential returns and investment risk in order to make a well-rounded financial decision. Managers should perform a comprehensive analysis that includes but is not limited to the payback period.