Question

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.

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.