Choice "B" is correct. The formula for calculating the payback period is:
Net Initial Investment / Increase in annual net after-tax cash flow |
The payback method computes the years needed to recoup an investment. The net cash inflows are generally assumed to be constant for each period during the life of the project. It is often used for risky investments, since it shows how quickly the initial investment will be recouped.Choice "a" is incorrect. The payback method does not consider the time value of money although a discounted payback method (which discounts the cash inflows) can be computed.
Choice "c" is incorrect. The payback method does not measure profitability.
Choice "d" is incorrect. The payback formula is not computed as the ratio of annual cash flows to net investment.
