Question

"When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return. True or False"

Answer 1

Answer:

True

Explanation:

The formula to compute the payback period is shown below:

Payback period = Initial investment ÷ Annual net cash inflow

When the company is cash poor so the first target is to improve the liquidity and maintain that liquidity so that the company is able to pay off its short term debt or obligations

Therefore for a long payback period and a high

A cash poor firms first target is to maintain the liquidity then it would lead to a short payback period but at the same time the less rate of return preferring a project with a long payback period having high rate

Hence, the given statement is true