Which of the following statements is TRUE of payback period? A. If the payback period is greater than the maximum acceptable payback period, management should be indifferent. B. If the payback period is less than the maximum acceptable payback period, accept the project. C. If the payback period is greater than the maximum acceptable payback period, accept the project. D. If the payback period is less than the maximum acceptable payback period, management should be indifferent.

Question

Business

Samantha

21 August, 23:16

Which of the following statements is TRUE of payback period? A. If the payback period is greater than the maximum acceptable payback period, management should be indifferent. B. If the payback period is less than the maximum acceptable payback period, accept the project. C. If the payback period is greater than the maximum acceptable payback period, accept the project. D. If the payback period is less than the maximum acceptable payback period, management should be indifferent.

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Immanuel Dyer · Answer 1

Answer:B. If the payback period is less than the maximum acceptable payback period, accept the project.

Explanation:

The payback period measures if a capital investment is profitable.

The payback period measures how long it takes to recover the amount invested in a capital project. It calculates how long it takes for the cash flows generated from a capital project to be equal to the cost.

For example if a project costs $10,000. It cash flows in year 1,2,3 and 4 are $5000, $3000, $2000, $6000. The payback period is 3 years. If the company has a maximum acceptable payback period of 2 years, then the company won't take on the project because its payback period is more than the maximum acceptable payback period.

If the company has a maximum acceptable payback period of 4 years, then the company would take on the project because its payback period is less than the maximum acceptable payback period.