alleryStart learning →Two projects with identical payback periods may still differ in value because payback ignores:
AHow much was invested
BWho approved the project
CWhich bank was used
DWhen the cash arrives
Answer & Solution
Correct answer: D. When the cash arrives
1. Payback treats all years within the period alike.
2. The payback method considers the time frame to recoup an investment.
3. It is based on expected annual cash flows.
4. It does not consider the effects of the time value of money.
5. So two projects repaying over the same span can differ in when the cash arrives.
_Source: OpenStax Principles of Accounting, Volume 2: Managerial Accounting (CC BY-NC-SA 4.0), Ch 11 'Capital Budgeting Decisions'_
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Related questions
Complete the capital budgeting rulesMatch each capital budgeting methodStack the capital budgeting termsSort the capital budgeting methodsPull the rope to the right method familyChoosing a project on payback alone risks favouring one that repays quickly but earns:Of the four named methods, how many account for the time value of money?The payback method's focus on recouping an investment makes it primarily a measure of: