Which of the following statements about payback periods is false? It measures the amount of time needed for a project to recover its initial investment. O It ignores post-payback cash-flows. It ignores the timing/time-value of the cash-flows.
Which of the following statements about payback periods is false? It measures the amount of time needed for a project to recover its initial investment. O It ignores post-payback cash-flows. It ignores the timing/time-value of the cash-flows.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Question:**
Which of the following statements about payback periods is false?
- ○ It measures the amount of time needed for a project to recover its initial investment.
- ○ It ignores post-payback cash-flows.
- ● It ignores the timing/time-value of the cash-flows.
- ○ Any project with a payback period less than two years will increase shareholder wealth.
- ○ It is rather easy to calculate.
**Explanation:**
The statement highlighted as false is that it ignores the timing/time-value of the cash-flows. This is indeed a correct description of payback periods, not false.
**Additional Clarification:**
The payback period method determines how long it takes for an investment to break even in terms of net cash flow. While it is simple to calculate, it does overlook the time value of money and any benefits that occur after the payback period. The highlighted false statement could be reconsidered as accurate, emphasizing the need to recognize this method’s limitations in timing and the value of cash flows.
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