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19. Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true? A. It will accept too many long-term projects and reject too many short- term projects (as judged by the NPV). B. The firm will accept too many projects in all economic states because a 4-year payback is too low. C. The firm will accept too few projects in all economic states because a 4-year payback is too high. D. If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.

19. Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true? A. It will accept too many long-term projects and reject too many short- term projects (as judged by the NPV). B. The firm will accept too many projects in all economic states because a 4-year payback is too low. C. The firm will accept too few projects in all economic states because a 4-year payback is too high. D. If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
Section: Chapter Questions
Problem 11P: Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The...
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19. Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true? A. It will accept too many long-term projects and reject too many short- term projects (as judged by the NPV). B. The firm will accept too many projects in all economic states because a 4-year payback is too low. C. The firm will accept too few projects in all economic states because a 4-year payback is too high. D. If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.
Transcribed Image Text:19. Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true? A. It will accept too many long-term projects and reject too many short- term projects (as judged by the NPV). B. The firm will accept too many projects in all economic states because a 4-year payback is too low. C. The firm will accept too few projects in all economic states because a 4-year payback is too high. D. If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.
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