question archive Which of the following statements is CORRECT? a

Which of the following statements is CORRECT? a

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Which of the following statements is CORRECT?

a. One drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback.  
b. The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.  
c. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.  
d. One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period.  
e. If a project's payback is positive, then the project should be accepted because it must have a positive NPV.

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Answer:

d. One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period.

Reason: Payback also ignores the cash flows beyond the payback period, thereby ignoring the profitability of the project. Thus, one project may be more valuable than another based on future cash flows, but the payback method does not capture this.

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