Payback is frequently used to analyze independent projects because:
A) It considers the time value of money.
B) All relevant cash flows are included in the analysis.
C) The cost of the analysis is less than the potential loss from a faulty decision.
D) It is the most desirable of all the available analytical methods from a financial perspective.
E) It produces better decisions than those made using either NPV or IRR.

Question

Quizplus · Accepted Answer

The payback method is often used because it is simple and less costly to perform compared to more complex analyses. It does not consider the time value of money (A is incorrect), does not include all relevant cash flows as it ignores those after the payback period (B is incorrect), and is not considered the most financially comprehensive method (D is incorrect) nor does it produce better decisions than NPV or IRR methods (E is incorrect).

Payback Is Frequently Used to Analyze Independent Projects Because