The discounted payback period is a capital budgeting criterion that accounts for:a.The time value of moneyb.The accounting rate of return (ARR)c.The payback periodd.The profitability index (PI)Clear my choice
Question
The discounted payback period is a capital budgeting criterion that accounts for:a.The time value of moneyb.The accounting rate of return (ARR)c.The payback periodd.The profitability index (PI)Clear my choice
Solution
The discounted payback period is a capital budgeting criterion that accounts for:
a. The time value of money
Explanation:
- The discounted payback period is a method used in capital budgeting to determine the time it takes for an investment to generate cash flows sufficient to recover the initial investment, considering the time value of money.
- The time value of money is the concept that money available today is worth more than the same amount in the future due to its potential earning capacity.
- Unlike the simple payback period, which does not consider the time value of money, the discounted payback period discounts the future cash flows to their present value before calculating the payback period.
- Therefore, the correct answer is (a) The time value of money.
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