The discounted payback rule may cause:
A) some positive net present value projects to be rejected.
B) the most liquid projects to be rejected in favor of less liquid projects.
C) projects to be incorrectly accepted due to ignoring the time value of money.
D) some projects with negative net present values to be accepted.
E) Both some positive net present value projects to be rejected; and some projects with negative net present values to be accepted.

Question

Quizplus · Accepted Answer

The discounted payback rule ignores the time value of money and simply looks at the time it takes to recoup the initial investment. This may cause some positive net present value projects to be rejected, as they may have a longer payback period. On the other hand, it may lead to some projects with negative net present values to be accepted if their payback period is short enough, even though they are not truly profitable once the time value of money is taken into account. Therefore, both scenarios can occur.

The Discounted Payback Rule May Cause