Suppose a financial manager decided to invest in a project a

Suppose a financial manager decided to invest in a project according to the discounted payback rule, and suppose that all cashflows after the initial cost are positive. Then: a. The project must have negative NPV b. The payback period is less than 1 year c. The financial manager is destroying firm value d. The project must have positive NPV e. The financial manager is not taking into account the risk of the project

Solution

Discounted payback period do consider time value of money and that why the cash flow is discounted at discounting rate. Only disadvantage of Discounted cash flow is, it consider only the time period up to which initial cash flow is equal to sum discounted cash flow. It is not consider the cash flow of entire life of project.

So, Discounted payback period destroying firm value.

Option (C) is correct answer.