Which of the Following Statements Is CORRECT? Assume That the Project

question 21

Multiple Choice

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

• A) The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.
• B) One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.
• C) If a project's payback is positive, then the project should be rejected because it must have a negative NPV.
• D) The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
• E) If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.

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Definitions:

Revenue Account

An account that tracks the income generated from the sale of goods or services before any expenses are subtracted.

Asset Account

An account on a company's balance sheet that represents tangible or intangible items of value owned by the company.

Debit

An accounting entry that increases an asset or expense account, or decreases a liability or equity account. It is positioned on the left in an accounting entry.

Credit

An accounting entry that increases a liability or equity account or decreases an asset or expense account, reflecting the opposite of a debit.