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If a project is acceptable using the net present value criteria, then it will also be acceptable...

Question:

If a project is acceptable using the net present value criteria, then it will also be acceptable under the less stringent criteria of the payback period.

True

False

Payback Period:

The payback period will measure the length of time to recover 100% of the initial costs. It will be compared with the expected cut-off point from the management team. If the payback period is less than the expected cut-off point, the project would be elected.

Answer and Explanation:

The answer is FALSE.

A positive NPV would not indicate that the use of the payback period will produce the same conclusion since the NPV method assesses all the cash flows while the payback period method might ignore huge cash flows after the cut-off point. This fact could lead to a different conclusion on the payback period.


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Payback Analysis: Formula & Example

from Introduction to Management: Help and Review

Chapter 16 / Lesson 12
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