Question

Which of the following is true regarding the payback method: 18 8 01:02:53 a. When a company is 'cash poor', a project with a short payback period but a low rate of return may be preferable to a project with a long payback period and a high rate of return b. The computation of the payback period is the project's initial investment divided by the present value of its net cash flows. c. A payback period of 35 means a company will earn 35 times its initial investment, d. The payback period increases as the cost of capital increases

Answer 1

b. The computation of the payback period is the project's initial investment divided by the present value of its net cash flows.

Step-by-step explanation:

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Payback period = Amount invested / cash flow

Discounted payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative discounted cash flows

payback period decreases as cost of capital increases

A payback period of 35 means a company will recover the amount invested in a project in 35 years