Assume the payback period for investment A is five years and the payback period for investment B is four years. Investment A has $1,000 more total net profit over its life than does investment alternative B over its life. Which of the two investments would you choose, if you use the payback method of capital budgeting?

Question

Quizplus · Accepted Answer

The payback method focuses on how quickly the initial investment can be recovered, not on the total net profit over the investment's life. Therefore, with a shorter payback period of four years, investment B would be chosen over investment A using the payback method.

Assume the Payback Period for Investment a Is Five Years