The time it takes to recover the initial investment
The profitability of a project over its lifetime
The total cash inflows from a project
The risk associated with a project
Correct Answer: The time it takes to recover the initial investment
Solution:
The Payback Period measures the time required to recover the initial investment from cash inflows.
What does the Payback Period measure?
Practice Questions
Q1
What does the Payback Period measure?
The time it takes to recover the initial investment
The profitability of a project over its lifetime
The total cash inflows from a project
The risk associated with a project
Questions & Step-by-Step Solutions
What does the Payback Period measure?
Step 1: Understand that the Payback Period is a financial metric.
Step 2: Know that it focuses on investments or projects.
Step 3: Realize that it measures how long it takes to get back the money you initially invested.
Step 4: Recognize that this is done by looking at the cash inflows generated by the investment.
Step 5: Conclude that a shorter Payback Period is generally better, as it means you recover your investment faster.
Payback Period – The Payback Period is a financial metric that calculates the time it takes for an investment to generate enough cash flow to recover its initial cost.
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