Asked by Adrianaya Roettger on Jul 16, 2024
Verified
If the payback period for a project is greater than its economic life the
A) project will always be profitable.
B) entire initial investment will never be recovered.
C) project would only be acceptable if the company's cost of capital was low.
D) project's return will always exceed the company's cost of capital.
Payback Period
The length of time required to recover the cost of an investment.
Economic Life
The estimated period over which an asset is expected to be economically useful to the owner.
Cost of Capital
The rate of return a company must earn on its investment projects to maintain its market value and attract funds.
- Comprehend the components and relevance of capital budgeting.
- Compute and elucidate the period for cash reimbursement.
Verified Answer
ND
NIyati DesaiJul 20, 2024
Final Answer :
B
Explanation :
If the payback period for a project is greater than its economic life, it means that the project will not generate enough cash flows to recover the initial investment before it reaches the end of its economic life. This indicates that the entire initial investment will never be recovered. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect because they do not represent a plausible scenario for a project with a payback period greater than its economic life.
Learning Objectives
- Comprehend the components and relevance of capital budgeting.
- Compute and elucidate the period for cash reimbursement.
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