Ace the AFP Exam 2025 – Boost Your Financial Wizardry!

Question: 1 / 400

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

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.

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Reduced project profitability

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