Final answer:
The Payback Period and the Discounted Payback methods are indeed biased towards liquid investments, as they emphasize earlier cash flows and the time taken to recover the initial investment, whereas AAR does not particularly favor liquidity. The correct answer is therefore D) I and III only.
Step-by-step explanation:
The question is assessing the understanding of investment appraisal methods and which are biased towards favoring liquid investments. Liquid investments are those that can be quickly converted into cash with little loss of value. The three appraisal methods mentioned in the question are:
- Payback Period: This method calculates the time it takes for an investment to pay back its initial cost from its cash inflows. It is biased towards liquidity because it favors projects with quicker paybacks without considering the long-term profitability or cash flows beyond the payback period.
- AAR (Accounting Rate of Return): This method looks at the average annual profit of an investment as a percentage of the average investment. It is not particularly biased towards liquidity since it is based on accounting profits over the life of the investment.
- Discounted Payback: Similar to the payback period but accounts for the time value of money by discounting the cash flows. It can be biased towards liquidity for focusing on the period until initial investment recovery, though less so than the simple payback period due to the consideration of time value.
Their biases towards liquid investments can be ranked as Payback Period being the most biased, followed by Discounted Payback, with AAR being the least.
Therefore, the correct answer is D) I and III only.