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).

Distinguish between cash basis and accrual basis of accounting.

Understand the role and function of special journals in the accounting cycle.

Apply the rules for revenue and expense recognition under the accrual basis.

Distinguish between permanent and temporary accounts and their roles in the accounting cycle.

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