Which of the following statements is CORRECT? Assume that the project being cons

Question

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.


a. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.

b. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.

c. The longer a project

Explanation / Answer

The answer is B. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. Note that D is wrong because the Discounted Payback Method overcomes the problem of the time value of money but not the issue of cash flows beyond the payback period.

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