In statistics, you learn about Type I and Type II errors. A Type I error occurs when
Question:
a. Describe the features of the payback rule that could lead to Type I errors.
b. Describe the features of the payback rule that could lead to Type II errors.
c. Which error do you think is more likely to occur when firms use payback analysis? Does your answer depend on the length of the cutoff payback period? You can assume a “typical” project cash flow stream, meaning that most cash outflows occur in the early years of a project.
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Related Book For
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart
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