A Characteristic of the Payback Method Is That It

question 102

Multiple Choice

A characteristic of the payback method is that it

• A) Cannot incorporate into the calculation the time value of money.
• B) Neglects total project profitability (i.e., profitability over the entire life of the project).
• C) Uses accrual accounting numbers in the numerator of the calculation.
• D) Uses the estimated life of the asset in the denominator of the calculation.
• E) Uses the hurdle (i.e., discount) rate in the calculation.

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Definitions:

Contribution Margin

The amount by which the sale of a product or service exceeds its variable costs, used to cover fixed costs and generate profit.

Incremental Annual Net Cash Inflows

The additional cash flow a company receives from undertaking a project, after accounting for direct costs and revenue changes.

Donut Maker

A kitchen appliance used specifically for making donuts.

Simple Rate

A basic, uncomplicated rate often used in calculations that do not require detailed financial complexity.