Association for Financial Professionals (AFP) Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Association for Financial Professionals Exam. Utilize flashcards and multiple-choice questions with hints and explanations. Ace your exam!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What is a significant risk associated with long payback periods in project evaluation?

Increased capital expenditures
Higher long-term interest rates
Uncertainty in projected cash flows
Reduced project profitability

The correct answer is: Uncertainty in projected cash flows

The significant risk associated with long payback periods in project evaluation revolves around uncertainty in projected cash flows. Long payback periods imply that it will take an extended time for the project to return its initial investment. During this lengthy timeframe, various factors such as market conditions, competitive landscape, regulatory changes, and shifts in consumer preferences can introduce volatility and unpredictability in cash flows. This uncertainty can complicate the evaluation of the project's feasibility and can reduce the confidence of stakeholders in the project's financial viability. In contrast, projects with shorter payback periods tend to have more predictable cash inflows within a shorter horizon, allowing stakeholders to better assess their returns and risks.