Which of the following ignores late cash flows? I. Profitability index II. Discounted payback period III....

Which of the following ignores late cash flows?
I. Profitability index
II. Discounted payback period
III. Net present value
IV. Payback period

I and III only

II and IV only

I, II, and III only

I, III, and IV only

Solutions

Expert Solution

The capital budgeting methods that ignore late cash flows are :-

Discounted payback period and payback period

So, the right answer is ----- II and IV only

Explanation :-

In payback period and discounted payback period method , cashflows upto the time of full recovery of initial cost is considered , the cash flows to be generated after the payback period are not taken into consideration and are ignored.

For Example :- Suppose a project has cash inflows for 5 years but payback period is 3 years, then the cash flows occuring in year 4 and 5 are ignored .

Discounted payback period method only discounts the cash flows to present value , otherwise it is same as payback period method and ignores the cash flows generated after the discounted payback period .

Explanation for rejection of other points :-

Net present value and profitability index method consider all the cash flows generated by a project . These method does not ignore the late cash flows .

So, the right answer is ( II and IV only )

jeff jeffy answered 1 year ago

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