A project with a payback period of four years is acceptable as long as the company's target payback period is greater than or equal to four years.
Capital Budgeting Techniques:
The capital budgeting techniques are used to determine the profitability of an investment based on the annual cash flows they generate, the required return on investment and the lifetime of the project. The various techniques include the net present value, the profitability index, the accounting rate of return, discounted payback period, payback period, etc.
Answer and Explanation:
A company whose target payback period is greater than or equal to four years can accept the project that has a payback period of 4 years or less.
Payback period refers to the number of years that investment takes to recover its initial investment cost from the annual cash flows it generates during its lifetime.
The payback period is a capital budgeting technique that does not use the concept of the time value of money in evaluating a project.
A project that has lower payback period should be considered over the projects with high payback periods.
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 24