Asked by Larissa Vanolli on May 10, 2024
Verified
Financing pressure or liquidity can explain the popular use of payback period in project appraisals for small firms.
Financing Pressure
The stress or difficulty a company faces in securing funds to finance its operations or expand its business.
Liquidity
The extent to which an asset or security can be quickly bought or sold in the market without affecting its price.
Payback Period
The number of years it takes a firm to recover its project investment. Payback does not capture a project’s entire cash flow stream and is thus not the preferred evaluation method. Note, however, that the payback does measure a project’s liquidity, and hence many firms use it as a risk measure.
- Realize the rationale behind the popular use of the payback period method amidst financial pressures.
Verified Answer
FA
Fizza AfzalMay 15, 2024
Final Answer :
True
Explanation :
Payback period is a simple method of project appraisal that focuses on the length of time it takes for a project to generate sufficient cash flows to recover its initial investment. This approach is particularly popular among small firms that may face financing or liquidity constraints, as it provides a quick and straightforward way to evaluate the feasibility of an investment without requiring complex financial calculations. By focusing on the payback period, firms can make more informed decisions about which projects to pursue and how to allocate their limited resources.
Learning Objectives
- Realize the rationale behind the popular use of the payback period method amidst financial pressures.