Which of the following statements about the payback period is FALSE?

The payback period is the time it takes for an investment to generate an amount of cash equal to the initial investment cost. This metric is primarily focused on the recovery of invested capital rather than the overall profitability or return of the investment over its entire useful life. When computing the payback period, it is essential to include the expected annual net cash inflows generated by the investment.

The formula for calculating the payback period varies depending on the situation. Generally, if the cash inflows are consistent, the payback period could be computed as the initial investment divided by the average annual cash inflow. However, if the cash inflows are not uniform, a more detailed analysis is required, accounting for the timing and varying amounts of inflows. Therefore, while the concept of dividing the initial investment by expected cash inflow may seem intuitively applicable, it oversimplifies the process and does not reflect the actual requirements for calculating the payback period effectively when cash inflows are not constant. Thus, stating that the payback period is computed as Initial investment divided by Expected annual net cash inflow is misleading and incorrect.