Payback Period and Cash Flow Analysis

Front

What does the payback period measure?

Back

The time it takes for an investment to recover its initial cost

Front

If an investment of $200,000 generates annual net cash flows of $50,000, the payback period is:

Back

4 years

Front

In Table 3, during which year does the cumulative net cash flow become positive?

Back

Year 3

Front

What is the exact payback period for the $200,000 machine example?

Back

2 years and 6 months

Front

Which of the following is a limitation of the payback period method?
Options:
It considers inflation in future cash flows,
It ignores long-term profitability,
It is too complex for businesses to use,
It measures qualitative factors such as social impact

Back

It ignores long-term profitability

Front

True or False? Net cash flow is calculated by subtracting cash inflows from cash outflows.

Back

False

Front

True or False? In Year 0 of investment appraisal, the net cash flow is always negative.

Back

True

Front

True or False? The payback period calculation accounts for the impact of inflation on future cash flows

Back

True

Front

True or False? The payback period for the $200,000 machine was reached during Year 3.

Back

True

Front

True or False? A limitation of the payback period method is that it ignores long-term profitability.

Back

True