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The discounted payback rule: A. does not always choose the better project if the firm has...

The discounted payback rule:

A. does not always choose the better project if the firm has to decide between two mutually exclusive projects

B. always leads to selecting projects that decrease firm value

C. does not rely on a discount factor

D. ignores the time value of money

Solutions

Expert Solution

The Payback period is the time period when the initial invested amount will be recovered after getting in the cashflow it ignores the effect of Time value of money. But discounted payback period takes time value of money in account and calculate the net present value of the cash flows and estimates the time when the discounted cash flows get equal to initial investment.

So by this option C and D can not be the answer

Well it tells how fast the initial investment will be recovered, which may not be the right choice all the time as for example take 2 projects. One gives more cash flows in the initial years and then stop giving after completing the payback period and the another which give significant cash flow for a large time period. Then in this case the discounted payback period will be less for the first project. So we by seeing discounted payback period any one will choose project 1. But it will not be the right choice as it stops giving cash flows just after that. In this case second project will be a good choice as it give continuous significant cast flows for many years.

So option A is the correct answer i.e. It does not always choose the better project if the firm has to decide between two mutually exclusive projects

jeff jeffy answered 1 year ago
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