In capital budgeting, which method measures the time required to recover the initial investment using cash inflows?

In capital budgeting, which method measures the time required to recover the initial investment using cash inflows?

• A. Payback period
• B. Profitability index
• C. Net present value
• D. Internal rate of return

Answer: (A)

The main idea here is the payback period, which measures how long it takes for the cash inflows from a project to recover the initial investment. You sum the expected cash inflows year by year (or period by period) until they equal the amount initially invested. The time when you reach that break-even point is the payback period. In its standard form, this method uses undiscounted cash inflows, so it doesn’t account for the time value of money (though some variations use discounting to form a discounted payback period). This approach is different from the profitability index, net present value, or internal rate of return, which focus on how valuable or profitable the project is rather than how quickly you get your money back.

The main idea here is the payback period, which measures how long it takes for the cash inflows from a project to recover the initial investment. You sum the expected cash inflows year by year (or period by period) until they equal the amount initially invested. The time when you reach that break-even point is the payback period. In its standard form, this method uses undiscounted cash inflows, so it doesn’t account for the time value of money (though some variations use discounting to form a discounted payback period).

This approach is different from the profitability index, net present value, or internal rate of return, which focus on how valuable or profitable the project is rather than how quickly you get your money back.