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Any project deemed acceptable using the discounted payback period will also be acceptable if...

Question:

Any project deemed acceptable using the discounted payback period will also be acceptable if using the traditional payback period.

True

False

Payback Analysis:

The payback analysis of capital budgeting is a measure of the time that lapses before an investor is compensated the initial cost form the expected cash inflows. The payback analysis is further sub-divided into the traditional payback period and the discounted payback period . The difference is that the traditional payback period calculations are based on the cash flows as they are stated while the discounted payback period applies cash flows after they are discounted to their present values.

Answer and Explanation:

Any project deemed acceptable using the discounted payback period will also be acceptable if using the traditional payback period.

  • True

The decision rule for both the traditional payback period and the discounted payback period is done by comparing each result to the cut-off period. The cut off period represents the timeline within which an investor deems a project as acceptable. Since the values of the discounted period are discounted they will be lower compared to the values of the traditional payback period. Therefore the discounted payback period is always longer than the traditional payback period.

If the discounted payback period meets the cut-off and the project is accepted then this implies that the traditional payback period will also meet the cut off period and the project will also be accepted under this approach as well.


Learn more about this topic:

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Payback Analysis: Formula & Example

from Introduction to Management: Help and Review

Chapter 16 / Lesson 12
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