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BPP ques: Is the following statement true or false?
By calculating the discounted payback period, we establish the time at which the NPV of an investment becomes positive.
My initial thought was that while calculating the DPP, we are looking to find the no. of years it takes to get back the initial investment after taking account of the time value of money. So if the DPP is lets say 3 years then in 3 years time, we will have recouped the original investment hence our cash outflow= PV of cash inflows making the NPV=0. so 0 is neither positive nor negative. therefore, the answer is false.
but BPP exam kit says its true. Please help me out Sir John…
thanking you in advance!The answer is true because it takes (using your example) 3 years for the NPV to start being positive. OK at exactly three years the NPV will be zero, but the whole point of both the standard payback period and the discounted payback period it is identify how long it takes to start being worthwhile.
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