The payback analysis shows the time for cash income from the investment to return the initial investment outlay.

The payback analysis shows the time for cash income from the investment to return the initial investment outlay.

• A. True
• B. False
• C. Not necessarily
• D. Not applicable

Answer: (A)

Payback period is a simple measure of liquidity that tells you how long it takes for the cash inflows from an investment to cover the initial cost. You’d add up the cash receipts each period, and the payback time is reached when those cumulative inflows equal the initial outlay. So the statement matches what payback analysis is designed to show: the time required to recover the initial investment. Keep in mind this method uses cash inflows and does not account for profits beyond payback or the time value of money (unless you use the discounted payback version). Still, the basic payback concept focuses on how quickly the initial investment is recovered.

Payback period is a simple measure of liquidity that tells you how long it takes for the cash inflows from an investment to cover the initial cost. You’d add up the cash receipts each period, and the payback time is reached when those cumulative inflows equal the initial outlay. So the statement matches what payback analysis is designed to show: the time required to recover the initial investment.

Keep in mind this method uses cash inflows and does not account for profits beyond payback or the time value of money (unless you use the discounted payback version). Still, the basic payback concept focuses on how quickly the initial investment is recovered.