Question
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
If a project's payback is positive, then the project should be rejected because it must have a negative NPV. |
If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. |
The longer a project's payback period, the more desirable the project is normally considered to be by this criterion. |
One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. |
The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. |
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