Which one of the following statements is correct concerning the payback period?
A)An investment is acceptable if its calculated payback period is greater than some pre-specified period of time.
B)An investment should be accepted if the payback is positive and rejected if it is negative.
C)An investment should be rejected if the payback is positive and accepted if it is negative.
D)An investment is acceptable if its calculated payback period is less than some pre-specified period of time.
E)An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate.

Question

Quizplus · Accepted Answer

The correct statement concerning the payback period is that an investment is acceptable if its calculated payback period is less than some pre-specified period of time. This is because the payback period is the amount of time it takes to recover the initial investment cost from the cash inflows generated by the investment. Therefore, the shorter the payback period, the quicker the initial investment is recovered, which is desirable for the investor. The pre-specified period of time is usually set by the investor or the company as a guideline for acceptable payback periods based on their investment goals and risk tolerance.

Which One of the Following Statements Is Correct Concerning the Payback