Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Question

Quizplus · Accepted Answer

The regular payback method only looks at the time it takes to recover the initial investment and does not take into account the time value of money, which is a major drawback. This means that cash inflows received later in the project's life are given the same weight as cash inflows received earlier, which is not correct. Discounted payback method solves this problem by taking into account the time value of money by discounting the cash flows. Therefore, statements B, C, D, and E are incorrect. Statement B is incorrect because a project's payback period may be positive but still have a positive NPV. Statement C is incorrect because only the discounted payback method overcomes the time value of money problem. Statement D is incorrect because it is the opposite of what happens. A company that uses the same payback requirement for all projects will tend to accept short-lived projects and reject long-lived projects. This will cause the company's risk to decrease over time. Statement E is incorrect because the shorter the payback period, the more desirable the project is considered by this criterion.

Which of the Following Statements Is CORRECT? Assume That the Project