A project's payback period is determined to be 4 years. If it is later discovered that additional cash flows will be generated in years 5 and 6, then A) the project's payback period will be reduced. B) the project's payback period will be increased. C) the project's payback period will be unchanged. D) the discount rate must be known to determine whether the payback period changes

Question

Business

Jamir

16 June, 12:34

A project's payback period is determined to be 4 years. If it is later discovered that additional cash flows will be generated in years 5 and 6, then A) the project's payback period will be reduced. B) the project's payback period will be increased. C) the project's payback period will be unchanged. D) the discount rate must be known to determine whether the payback period changes

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Brady Wong · Answer 1

C) the project's payback period will be unchanged.

Explanation:

Payback period is the time period in which initial investment of the asset recovered from it benefit. In this Question the Initial Investment is recovered in year 4, the cash flows of year 5 and year 6 will not effect the payback period. It remains the same because the cash flows of first 4 years remains same. The change in the first 4 years would impact the payback period. With constant discount rate the payback period will remain unchanged.