Question

The payback method is often more useful than the net present value method for evaluating systems projects because the effective lives of information system tend to be short and shorter payback projects are often desirable.

True/False

Answer 1

True

Step-by-step explanation:

The payback method of evaluating capital expenditure projects is very popular because it's easy to calculate and understand. It has severe limitations, however, and ignores many important factors that should be considered when evaluating the economic feasibility of projects.

In finance, the net present value or net present worth applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money.

Payback method considers the time that a project takes to payback the capital invested in it from its net cash flows.

The payback method is often more useful than the net present value method for evaluating systems projects because the effective lives of information system tend to be short and shorter payback projects are often desirable.

Answer 2

True

Step-by-step explanation:

Payback method considers the time that a project takes to payback the capital invested in it from its net cash flows.

Projects that have a short payback period are preferred by investors because the capital invested takes a shorter time to be repaid. That is shorter risk period.

Net present value is a consideration of the expected future cash flows in a project. It is the difference between the net present value of an asset and the present value of cash flows over a certain period. It's calculation is based on a lot of assumptions so it is probe to error.

Payback method is preferred because the effective lives of information system tend to be short and shorter payback projects are often desirable.