Suppose a Firm Relies Exclusively on the Payback Method When

question 58

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 long-term projects and reject too many short-term projects (as judged by the NPV).
• B) The firm will accept too many projects in all economic states because a 4-year payback is too low.
• C) The firm will accept too few projects in all economic states because a 4-year payback is too high.
• D) 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.
• E) It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).

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