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.

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Definitions:

Dissociative

Referring to a disruption or discontinuity in the normal integration of consciousness, memory, identity, emotion, perception, body representation, motor control, and behavior.

Schizophrenia

A long-term mental disorder involving a breakdown in the relation between thought, emotion, and behavior, leading to faulty perception and inappropriate actions.

Dissociative Disorders

Mental health conditions that involve disruptions or breakdowns of memory, awareness, identity, or perception.

Personality

The combination of characteristics or qualities that form an individual's distinctive character and behavioral patterns.