Evaluate the following projects using the payback method assuming a rule of 3 years for payback.
A) Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years.
B) Project B should be accepted because even though the payback period is 2.5 years for Project A and 3.001 for project B, there is a $1,000,000 payoff in the 4th year in Project B.
C) Project B should be accepted because you get more money paid back in the long run.
D) Both projects can be accepted because the payback is less than 3 years.

Question

Evaluate the following projects using the payback method assuming a rule of 3 years for payback. 
A) Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years. 
B) Project B should be accepted because even though the payback period is 2.5 years for Project A and 3.001 for project B, there is a $1,000,000 payoff in the 4th year in Project B. 
C) Project B should be accepted because you get more money paid back in the long run. 
D) Both projects can be accepted because the payback is less than 3 years.

Quizplus · Accepted Answer

The payback period for Project A is within the rule of 3 years, and thus it can be accepted. However, Project B cannot be accepted because its payback period is longer than 3 years. The high payoff in the 4th year is not considered in the payback method, which only looks at the time it takes to recover the initial investment. The payback method does not consider the profitability of the project beyond the payback period. Hence, it is not a suitable method to compare the long-term profitability of different projects.

Evaluate the Following Projects Using the Payback Method Assuming a Rule