Which one of the following statements is correct? Question 19 options: A longer payback period is preferred over a shorter payback period. The payback rule states that you should accept a project if the payback period is less than one year. The payback period ignores the time value of money. The payback rule is biased in favor of long-term projects. The payback period considers the timing and amount of all of a project's cash flows.

This could primarily be classified to be amongst the major disadvantages of the payback period that it ignores the time value of money which is a very important business concept. In the other hand, the payback period disregards the time value of money. It is determined by counting the number of years it takes to recover the funds invested. Some analysts favor the payback method for its simplicity. Others like to use it as an additional point of reference in a capital budgeting decision framework.

The payback period does not account for what happens after payback, ignoring the overall profitability of an investment.

ogorwyne ogorwyne · Answer 2 · 2021-12-31T12:19:58+01:00

The correct statement here is that the payback period ignores the time value of money.

Contrary to what is obtainable in other ways of capital budgeting, the payback period is known to not have the need for the time value of money.

The time value of money can be described as the idea that the money that is at hand today has more value than the same amount of money in the future.

This is due to the potential that the money has today in terms of earnings.

Read more on the time value of money here:

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