The payback period rule:
A) determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule.
B) determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year.
C) requires an arbitrary choice of a cutoff point.
D) varies the cutoff point with the interest rate.
E) Both determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule; and varies the cutoff point with the interest ratE.

Question

Quizplus · Accepted Answer

The payback period rule requires an arbitrary choice of a cutoff point, which is not based on any objective criteria like the NPV rule. The choice of cutoff point depends on the decision maker's preference for short-term or long-term investments and risk tolerance. Therefore, the payback period rule is not a reliable method for evaluating investment projects.

The Payback Period Rule