Suppose a Firm Relies Exclusively on the Payback Method When

question 59

Multiple Choice

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?

• A) It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).
• B) It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).
• C) The firm will accept too many projects in all economic states because a 4-year payback is too low.
• D) The firm will accept too few projects in all economic states because a 4-year payback is too high.
• E) If the 4-year payback results in accepting just the right set of projects under average economic conditions,then this payback will result in too few long-term projects when the economy is weak.

---

Definitions:

Adrenal Glands

Endocrine glands located above the kidneys that produce a variety of hormones, including adrenaline and cortisol, which regulate stress responses and other bodily functions.

Thyroid Gland

An endocrine gland in the neck that produces thyroid hormones, which regulate the body's metabolism, energy level, and overall growth and development.

Epinephrine

Epinephrine, also known as adrenaline, is a hormone and neurotransmitter involved in the body's fight-or-flight response.

Adrenal Glands

Glands located on top of the kidneys that produce a variety of hormones including adrenaline and cortisol.