Question
Which of the following statement(s) is/are true about payback period? (Select the correct answer from the options below the statements) (1) It ignores cash inflows after the payback period (2) It does not relate to shareholders' wealth (3) It takes little account of the timing of cash flows (1) only (1) and (2) All of the above None of the above
Answer
3.7
(275 Votes)
Alexis
Professional · Tutor for 6 years
Answer
All of the Above
Explanation
## Step 1:To determine the correct answer, we need to understand what the payback period represents and analyze each of the statements related to it.## Step 2:Payback period is a basic investment appraisal method that computes the period required to recoup the initial investment. ## Step 3:Examine Statement (1). "It ignores cash inflows after the payback period".This is true. Payback period only considers cash inflows till the investment is recuperated. It does not take into account any cash inflows after the initial investment is recovered.## Step 4:Evaluate Statement (2). "It does not relate to shareholders' wealth."This is also true. The payback period method does not deal directly with how the investment might affect the wealth of shareholders. It simply shows the time it would take to get the initial investment back.## Step 5:Consider Statement (3). "It takes little account of the timing of cash flows."This statement is true as well. The payback period primarily focuses on when an initial investment will be reimbursed, regardless of when the cash flows may occur.With the scrutiny of these statements based on payback period concepts, we see that all statements are accurate.