alleryStart learning →Choosing a project on payback alone risks favouring one that repays quickly but earns:
AMore over its full life
BExactly the same amount
CNothing at all ever
DLess over its full life
Answer & Solution
Correct answer: D. Less over its full life
1. Payback measures speed of recovery, not total return.
2. The payback method considers only the time frame to recoup an investment.
3. It does not consider the effects of the time value of money.
4. It also says nothing about cash flows after the payback point.
5. So a fast-repaying project may earn less over its full life.
_Source: OpenStax Principles of Accounting, Volume 2: Managerial Accounting (CC BY-NC-SA 4.0), Ch 11 'Capital Budgeting Decisions'_
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