- CFA Exams
- CFA Exam: Level I 2021
- Study Session 10. Corporate Finance (1)
- Reading 32. Capital Budgeting
- Subject 3. Investment Decision Criteria

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**CFA Practice Question**

An advantage of the payback period rule is that it ______

II. discounts cash flows.

III. is simple to use.

I. adjusts for uncertainty of early cash flows.

II. discounts cash flows.

III. is simple to use.

Correct Answer: III only

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**User Contributed Comments**
2

User |
Comment |
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loisliu88 |
why is l not right? it tells us how long the initial investment will be tied up in the project, therefore indicates project's risk and a hint of liquidity. |

Bududeen |
uncertainty implies risk... the nominal cash flows when not discounted by the cost of capital have not been adjusted for risk and uncertainty..hence, I is not correct |