Which of the following statements are true? 1 Point The payback period is measured as a percent. The AAR is similar to the calculation for the return on assets. The discounted payback is better than the payback because it does not require an arbitrary cutoff point. none of the above. Submit Answer
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" The payback period is measured in time units (e.g., years), not as a percentage. Therefore, this statement is false. Show more…
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What information does the payback period provide? Payback period essentially provides the number of years it would take for a project to recover the initial investment from its operating cash flows. As the model was criticized, the model evolved incorporating time value of money to create the discounted payback method. The models still reflected faulty ranking criteria but they provided important information about liquidity and risk. Cash flows expected in the distant future are risky than cash flows received in the near-term—which suggests that the payback period can also serve as an indicator of project risk. Suppose ABC Telecom Inc.'s CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. Year Cash Flow Year 1 $300,000 Year 2 475,000 Year 3 500,000 Year 4 450,000 If the project's weighted average cost of capital (WACC) is 9%, what is its NPV? $354,910 $390,401 $372,656 $337,165 Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. The discounted payback period does not take the time value of money into account. The discounted payback period does not take the project's entire life into account. The discounted payback period is calculated using net income instead of cash flows.
Adi S.
a. NPV and IRR are more appropriate for long-term investments. b. ARR highlights risky investments and shows the effect of the investment on the company's accrual-based income. c. IRR is the interest rate that makes the NPV of an investment equal to zero. d. NPV requires management to identify the discount rate when used. e. Payback provides management with information on how fast the cash invested will be recouped. f. IRR is the rate of return a company can expect to earn by investing in the asset. g. ARR does not consider the asset's profitability and uses accrual accounting rather than net cash inflows in its computation.
There are several disadvantages to the payback method, among them: a. Payback ignores the time value of money. b. Payback emphasizes receiving money back as fast as possible for reinvestment. c. Payback is basic to use and to understand. d. Payback can be used in conjunction with time-adjusted methods of evaluation.
Madhur L.
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