Final answer:
(A) I only
The Payback Period is the only option among the given choices that uses an arbitrary cutoff number in its decision rule.
Step-by-step explanation:
The Payback Period is the only option among the given choices that uses an arbitrary cutoff number in its decision rule. The Payback Period is used to determine the time it takes for an investment to recover its initial cost. It is calculated by dividing the initial investment by the annual cash flow. If the payback period is less than or equal to a predetermined cutoff period, the investment is accepted. Otherwise, it is rejected.
The AAR (Average Accounting Return) and IRR (Internal Rate of Return) do not use arbitrary cutoff numbers in their decision rules. The AAR calculates the average net income of an investment over its lifespan and compares it to the average investment.
If the AAR exceeds a predetermined target rate, the investment is accepted. The IRR, on the other hand, calculates the discount rate at which the net present value of an investment's cash flows is zero. If the IRR exceeds a predetermined required rate of return, the investment is accepted.
Thus, the correct answer is Option A: I only.