The Payback Period Rule states that a company will accept a project if:
Question
The Payback Period Rule states that a company will accept a project if:
Solution
The Payback Period Rule states that a company will accept a project if the payback period of the project is less than a predetermined period of time. Here are the steps to understand this:
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Identify the Initial Investment: This is the total cost required to implement the project.
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Determine the Cash Inflows: These are the returns that the project will generate over its lifetime.
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Calculate the Payback Period: This is done by dividing the initial investment by the annual cash inflows. The result is the number of years it will take to recover the initial investment.
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Compare with Predetermined Period: If the calculated payback period is less than the predetermined period set by the company, then the project is accepted. If it's more, the project is rejected.
This rule is a simple way for companies to evaluate the risk of an investment. However, it does not take into account the time value of money or cash flows that occur after the payback period.
Similar Questions
Three projects have the following initial outlays and free cash flows.If these are mutually exclusive, which projects would a firm using the payback rule accept if the cut-off period is three years?(20 Points)
Activity 2: Concept Check (Payback) Q1) Which of the following statements is FALSE? A Payback period refers to the number of periods take to recover the initial investment of a project. B The payback rule is reliable because it considers the time value of money and depends on the cost of capital. C The payback rule is primarily used because of its simplicity. D The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV. SUBMIT
This is the time required to recover the initial investment in a project.Select one:a.Post-Payback Profitabilityb.Accounting Rate of Returnc.Internal Rate of Returnd.Payback Period
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Which of the following statement is incorrect? O a. Payback period is defined as the number of years it takes for the cash flows from a project to recover the project's initialinvestment. O b.NPV method is better than payback period method in the way that NPV method accounts for the time value of moneywhereas payback period method does not. O c. In general, there can be as many lRRs as the number of times the project's cash flows change sign over time. O d. An internal rate of return (IRR) will always exist for an investment opportunity.
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