GK
ACCOUNTING
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]


The econontic life of the project is at least twice of the pay back period


Annual savings are even for the entire period


Both (a) and (b)


None of the above

Detailed explanation1: The payback reciprocal is the payback period for an investment, divided by 1. This reciprocal yields an approximation of the rate of return on an investment, though only when annual cash flows are uniformly even over the lifetime of the investment, and the cash flows from the project will continue forever.
Detailed explanation2: Payback reciprocal is the reciprocal of the payback time. This often gives a quick, accurate estimate of the internal rate of return (IRR) on an investment when the project life is more than twice the payback period and the cash inflows are uniform every period.
Detailed explanation3: 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 shortterm cash flows are a concern, a short payback period may be more attractive than a longerterm investment that has a higher NPV.
Detailed explanation4: Several methods are commonly used to rank investment proposals, including NPV, IRR, PI, payback period, and ARR.