Ralph Corp. is considering whether to invest $10 million in the jam business or in the peanut butter business. If Ralph invests in jam, it will receive inflows for six different years of $2.5 million each. If it invests in peanut butter, it will receive inflows of $3 million each in years 1, 2, and 3, and $1 million each in years 4, 5, and 6. Which method of evaluating investments will consider the two different investment possibilities to be equally attractive?
A) Net present value
B) Internal rate of return
C) Accounting rate of return
D) Payback period

Question

Quizplus · Accepted Answer

The payback period method evaluates investments based on how quickly the initial investment can be recovered without considering the time value of money. Both options have a total inflow of $15 million over six years, so by this method, they would be considered equally attractive as they both recover the initial investment in the same timeframe.