Q10RQ - Horngren'S Financial And Managerial Accounting

Question

What is the decision rule for payback?

Step-by-Step Solution

Answer

Answer

The general rule is that investments with shorter payback periods are observed as more appropriate and preferable.

Step 1: Meaning of Payback

The payback period is used to compare projects in capital arrangements and evaluate the time it takes for the initial venture to recover in years. The payback period is the time it takes to recover the initial expense.

Step 2: Decision rule for payback

The greater the risk, the longer the project's payback period. If two ventures with equal returns are commonly contradictory, the choice ought to be made to contribute to the project with the most limited payback period.

The payback period refers to the amount of time it takes for the initial investment in a project to be returned by future cash flows. The best project is the one that helps the company return its investment the quickest, and it is the one to which the company should devote its resources.