Which of the statements below is TRUE of the payback period method? A

Which of the statements below is TRUE of the payback period method?

A) It ignores the cash flow after the initial outflow has been recovered.
B) It is biased against projects with early-term payouts.
C) It incorporates time-value-of-money principles.
D) It focuses on cash flows after the initial outflow has been recovered.

ANSWER

Answer: A
Explanation: A) By ignoring the cash flow after the initial outflow has been recovered, the payback period is biased toward those projects that have higher early-year cash inflow and against those with higher late-year inflow.