Many firms today continue to use the payback method but also employ the NPV or IRR methods...

Question:

Many firms today continue to use the payback method but also employ the NPV or IRR methods especially when large projects are being analyzed.

True

False

Payback Period:

The payback period is the capital budgeting method to evaluate how long a project's cost could be recovered completely. If the payback period is less than the expected cut-off point, the management team should process the project.

Answer and Explanation:

The answer is TRUE.

Some firms, these days, still apply the payback period to decide whether they should process a project. Mostly, the payback period will be more meaningful to the selection process since the time value of money in the short-term will have less effect on the outcome. For most of the large projects, the joint of NPV or IRR is required since those two methods could solve the limitation on the payback period. For instance, the NPV would employ the time value of money in its calculation while the payback period would ignore it.


Learn more about this topic:

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How to Calculate Payback Period: Method & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 24
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