Which of the following statements is FALSE? The payback period tends to ignore t
ID: 2800204 • Letter: W
Question
Which of the following statements is FALSE?
The payback period tends to ignore the later cash flows.
The payback period is useful as a rough measure of a project's liquidity.
The payback period ignores the time value of money.
The payback period depends on the cost of capital (WACC).
The payback period tends to ignore the later cash flows.
The payback period is useful as a rough measure of a project's liquidity.
The payback period ignores the time value of money.
The payback period depends on the cost of capital (WACC).
Explanation / Answer
If there is a project for which the initial investment gets recovered within first two years, then payback period would be 2 years, it would then ignore the later investments which might be required in the project, which makes the option A correct.
payback period method is used because it is a simple method to know the possible time to recover the investment and is a rough measure of liquidity. option B is also correct
payback method does not take into account the time value of money as it does not consider the present values of the cash flows which happens in the discounted payback method. option C is also correct
Payback period has nothing to do with the cost of capital, it is independent of the value of WACC, so option D is false.
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