Which metric ignores the time value of money by measuring how long it takes to recover the initial outlay?

• A. Net present value.
• B. Payback period.
• C. Internal rate of return.
• D. Cost of capital.

Answer: (B)

The concept being tested is identifying which investment metric ignores the time value of money and focuses on how long it takes to recover the initial outlay. The payback period does that: it looks at cash inflows year by year and stops when the accumulated cash equals the initial investment, reporting the time required to breakeven. Because it doesn’t discount future cash flows, it treats money received in the future as equally valuable as money today, which is why the time value of money is ignored. This makes it a simple liquidity gauge, useful for quick risk assessments, but it doesn’t measure overall profitability and ignores any cash flows after the payback and the cost of capital.

Net present value and internal rate of return both incorporate the time value of money by discounting future cash flows, so they reflect when money is received. Cost of capital isn’t a measure of how fast money is recovered but the minimum return required to justify the investment, used in discounting and decision rules.