Which of the following is measured by the payback period method? A. The period for which an...

Question:

Which of the following is measured by the payback period method?

A. The period for which an investment is expected to be useful

B. The economic life of an investment

C. The estimated length of time to recover the cost of an investment

D. The expected cash inflows and outflows of an investment

Answer and Explanation:

The payback period method measures C. The estimated length of time to recover the cost of an investment. Projects with shorter payback periods, under this method, are more desirable than projects with longer payback periods. For example, consider the following two investments.

Project A Project B
Initial Investment ($1,000) ($1,000)
Year 1 $200 $500
Year 2 $200 $300
Year 3 $200 $200
Year 4 $200 $100
Year 5 $200 $100

We see that Project A has a payback period of 5 years ($200 x 5 years = $1,000) while Project B has a payback period of 3 years ($500 + $300 + $200 = $1,000). Under the payback period method, Project B is preferable to Project A since Project B has a shorter payback period.


Learn more about this topic:

How to Calculate Payback Period: Method & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 24
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