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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'_
Related questions
Choosing 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:A manager wanting to account for discounting should choose which pair of methods?Capital investment decisions are described as decisions that are:A method that ignores the time value of money treats a dollar received in five years as:The non-time value methods are described as being examined in which order?The accounting rate of return is grouped with the payback method because both are: