Which statement regarding payback is true?
A)The regular payback method recognizes all cash flows over a project's life.
B)The discounted payback method recognizes all cash flows over a project's life, and it also adjusts these cash flows to account for the time value of money.
C)The regular payback method was widely used years ago, but virtually no companies even calculate the payback today.
D)The regular payback is useful as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.

Question

Quizplus · Accepted Answer

The regular payback method calculates the amount of time it takes to recover the initial investment, making it a useful indicator of a project's liquidity. The other statements are incorrect - the regular payback method only recognizes cash flows up to the point of payback, and while the discounted payback method adjusts for time value of money, it may not recognize all cash flows over a project's life. Additionally, while the regular payback method may not be as commonly used today, it is still a relevant tool for some companies.

Which Statement Regarding Payback Is True