Understanding the Payback Period Method

What is the primary purpose of using the payback period method in investment appraisal?

• To calculate the total profit of an investment

• To assess the time it takes to recover the initial investment

• To determine the interest rate of an investment

• To evaluate the long-term profitability of an investment

How does the payback period method help businesses in terms of risk evaluation?

• By predicting future market trends

• By offering a quick assessment of investment recovery time

• By calculating the exact profit margin

• By providing a detailed financial analysis

What is cumulative cash flow in the context of the payback period method?

• The total expenses incurred during an investment

• The interest earned on an investment over time

• The running total of net cash flows minus the initial investment cost

• The total profit generated by an investment

In the software company example, what was the initial investment amount?

• £250,000

• £200,000

• £150,000

• £100,000

How long did it take for the software company's investment to reach the payback point?

• 5 years

• 3 years and 1 month

• 3 years and 3 months

• 4 years and 2 months

For the retail store's expansion project, what was the cumulative cash flow at the end of the third year?

• £-5,000

• £0

• £5,000

• £10,000

What was the payback period for the retail store's investment?

• 3 years and 1 month

• 3 years and 3 months

• 4 years

• 5 years

Which of the following is an advantage of the payback period method?

• It considers the time value of money

• It provides a rapid evaluation of investment recovery time

• It accounts for all future cash flows

• It guarantees long-term profitability

What is a limitation of the payback period method?

• It is too complex to calculate

• It does not consider the time value of money

• It is only applicable to short-term investments

• It requires extensive data analysis

Why might establishing a payback period benchmark be challenging?

• It is based on subjective criteria

• It requires precise financial forecasting

• It depends on government regulations

• It involves complex mathematical models