Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because ________.
A) it explicitly considers the time value of money
B) it can be viewed as a measure of risk exposure due to its focus on liquidity
C) the determination of the required payback period is an objectively determined criteria
D) it considers the timing of cash flows and therefore the time value of money

Question

Quizplus · Accepted Answer

The payback period is focused on liquidity, which means that it provides insight into how quickly an investment can generate cash flows to cover its cost. As such, it can be viewed as a measure of risk exposure. Some firms may use it as a decision criterion or supplement to other techniques because it provides a simple, easy-to-understand measure of risk that considers the timing of cash flows. While it does not explicitly consider the time value of money, it indirectly does so by prioritizing investments that generate cash flows sooner rather than later.

Some Firms Use the Payback Period as a Decision Criterion