The cash payback technique determines the time required to recover the initial capital investment from annual cash inflows. It is one of the simplest capital budgeting methods, focusing on liquidity and risk reduction.
The payback period helps management assess the risk of investment decisions.
Shorter payback periods indicate faster capital recovery, which is desirable for risk-averse firms.
The IIA’s Practice Guide: Financial Decision-Making supports the use of payback analysis for assessing capital investments.
B. Annual rate of return technique → Incorrect. This method calculates the percentage return on an investment but does not measure how long it takes to recover the investment.
C. Internal rate of return (IRR) method → Incorrect. IRR determines the discount rate at which the investment's net present value (NPV) is zero, but it does not calculate the payback period.
D. Net present value (NPV) method → Incorrect. NPV considers the time value of money but focuses on overall profitability, not the time required to recover initial investment.
IIA’s Global Internal Audit Standards on Capital Budgeting and Investment Analysis recommend payback period analysis for investment risk assessment.
IIA Standard 2130 – Control Self-Assessment highlights financial viability and risk analysis in investment decision-making.
COSO Enterprise Risk Management (ERM) Framework supports the use of the payback method for risk mitigation in capital projects.
Why Option A is Correct?Explanation of the Other Options:IIA References & Best Practices:Thus, the correct answer is A. Cash payback technique.
