The payback period ignores the time value of money and therefore should not be used as a...

Question:

The payback period ignores the time value of money and therefore should not be used as a screening device for the selection of capital budgeting projects.

True

False

Payback Period:

The payback period measures the length of time that the initial cost is recouped completely, ignoring the time value of money. If the payback period is less than the expected cut-off point, the project should be selected.

Answer and Explanation:

The answer is FALSE.

For the project with a short lifetime, the payback period can be still used as a screening device for the selection of the project since the time value of money would have less impact on the payback period in the short-term.


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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