A firm may choose a project with a rapid payback period rather than one with a larger net present value because:

Question

Quizplus · Accepted Answer

A firm with a poor cash position and limited access to outside finance may prioritize a project with a rapid payback period in order to quickly generate cash flows to cover their expenses and improve their financial position in the short term. In this case, the larger net present value of a project with a longer payback period may not be as important as the immediate cash flow benefits of a project with a rapid payback.

A Firm May Choose a Project with a Rapid Payback