Which one of the following statements is true? One advantage of the payback method is that it provides information about liquidity and risk. With all else held constant; the longer the payback, the greater the project's liquidity. The discounted payback method not only recognizes all cash flows over a project's life but also adjusts these cash flows to account for the time value of money Question 2 options: Statement 1 Statement 2 Both statement 1 and 2 None of the above
Added by Ricardo G.
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- The statement claims that one advantage of the payback method is that it provides information about liquidity and risk. This is true because the payback period indicates how quickly an investment can return its initial cost, which is a measure of liquidity. Show more…
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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.
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Which of the following statements is true regarding the payback period?
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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.
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