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 because of its focus on liquidity.
C) the determination of the required payback period for a project is an objectively determined criteria.
D) none of the above.

Question

Quizplus · Accepted Answer

The payback period is primarily focused on the liquidity of the project, meaning how quickly the cash flows can be recovered. This can be seen as a measure of risk exposure, as a shorter payback period means there is less risk of not recovering the investment. While the payback period does consider the time value of money to some extent, it does not explicitly discount future cash flows. The determination of the required payback period is also subjective and can vary across firms and industries.

Some Firms Use the Payback Period as a Decision Criterion