CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Which statement about the discounted payback period is correct?
Discounted payback is never shorter than simple payback for a conventional project. Discounting lowers the value of each inflow, so more time is needed to recover the outlay, although it still ignores cash flows after the recovery point.
- AIt ignores the time value of money
- BIt considers cash flows after the payback point
- CIt is never shorter than the simple payback period for conventional projectsCorrect
- DIt equals the IRR of the project
Explanation
Discounting reduces each inflow's value, so recovery of the outlay takes at least as long as under simple payback. It still ignores cash flows after the cut-off and does account for time value. It is unrelated to IRR.
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