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Home > Finance > Question

What is the Payback Period:

0
A) Time required to calculate depreciation
B) Time required to double investment
C) Time required to earn profit after tax
D) Time required to recover initial investment cost from cash inflows

Correct Answer: D) Time required to recover initial investment cost from cash inflows

• The Payback Period is explicitly defined in finance as the Time required to recover initial investment cost from cash inflows. • A massive structural flaw of the traditional payback period is that it completely ignores the Time Value of Money. • Projects with significantly shorter payback periods are generally considered much Less risky. • Modern corporate finance heavily prefers the discounted payback period to properly account for Inflation and interest. • The payback period method strictly focuses on cash flows rather than accounting Net income.

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