CFA Level 1: Project Payback Period Analysis

Project Payback Period Analysis

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Question

Which of the following is/are true for a project which needs only an initial outlay and no further expenses?

I. The shorter the payback period, the greater the liquidity of the project.

II. The discounted payback period is always more than the simple payback period.

III. The payback period rule considers all the cash flows involved in a project.

Answers

Explanations

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A. B. C. D. E. F. G.

C

The payback period measures how quickly you recover your initial investment. The shorter this period, the greater the liquidity in terms of cash recovery. The payback rule ignores cash flows beyond the payback period. The discounted payback period is defined as the expected number of years that would be required to recover the original investment using discounted cash flows. Hence, (II) is true if there are no negative cash flows after the initial investment since discounting reduces the present value of the future cash flows.

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