COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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An investment is acceptable if its calculated payback period is less than some pre-specified period of time.
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An investment should be accepted if the payback is positive and rejected if it is negative.
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An investment should be rejected if the payback is positive and accepted if it is negative.
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An investment is acceptable if its calculated payback period is greater than some pre-specified period of time.
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Detailed explanation-1: -An investment is acceptable if its calculated payback period is greater than some pre-specified period of time.
Detailed explanation-2: -Payback Period: The payback period method is one of the capital budgeting techniques. Businesses should select the project only if the payback period is lower than the maximum time required to recover the investment.
Detailed explanation-3: -An investment is acceptable if its calculated payback period is less than some prespecified number of years. We calculate the payback period by simply adding up the future cash flows. There is no discounting involved, so the time value of money is completely ignored.
Detailed explanation-4: -Answer and Explanation: Correct Answer: Option A. The payback method does not consider the time value of money.
Detailed explanation-5: -The payback period is favored when a company is under liquidity constraints because it can show how long it should take to recover the money laid out for the project. If short-term cash flows are a concern, a short payback period may be more attractive than a longer-term investment that has a higher NPV.