Which metric measures how quickly the initial investment is recovered, without considering the time value of money?

Which metric measures how quickly the initial investment is recovered, without considering the time value of money?

• A. Payback Period
• B. Net Present Value
• C. Internal Rate of Return
• D. Accounting Rate of Return

Answer: (A)

The main idea here is how quickly the initial investment is recovered, without considering the time value of money. The payback period does exactly that: it measures the amount of time required for cumulative cash inflows to equal the initial outlay. For example, if you invest 100 and receive 25 each year, you recover your money in four years. Because it doesn’t discount future cash flows, money received later is treated the same as money received earlier, which is why it’s a simple liquidity gauge but ignores the changing value of money over time. This makes it useful for assessing how quickly you can get your cash back and how exposed you are to risk, but it doesn’t account for profits after payback or the opportunity cost of capital. Other metrics, like net present value, internal rate of return, and accounting rate of return, involve the time value of money or use accounting profits, so they address different questions about an investment.

The main idea here is how quickly the initial investment is recovered, without considering the time value of money. The payback period does exactly that: it measures the amount of time required for cumulative cash inflows to equal the initial outlay. For example, if you invest 100 and receive 25 each year, you recover your money in four years. Because it doesn’t discount future cash flows, money received later is treated the same as money received earlier, which is why it’s a simple liquidity gauge but ignores the changing value of money over time. This makes it useful for assessing how quickly you can get your cash back and how exposed you are to risk, but it doesn’t account for profits after payback or the opportunity cost of capital. Other metrics, like net present value, internal rate of return, and accounting rate of return, involve the time value of money or use accounting profits, so they address different questions about an investment.