Consider the following statements regarding the "Payback Period" in energy projects:1.It is the time taken for the cumulative energy savings to equal the initial investment.2.A shorter payback period indicates a more financially attractive project.3.Simple Payback Period (SPP) accounts for the "Time Value of Money"Which of the statements given above is/are correct?

Correct Answer: B - 1 and 2 only

Quick Concept Explanation

Simple payback is easy and useful for first screening, but it is not a complete profitability measure. Discounted payback, NPV and IRR address time value more explicitly. Key relation: If annual savings are uniform: SPP = Initial investment / Annual net savings. Discounted methods use PV = CF_t/(1+r)^t.

Exam focus: Whenever a question says “simple payback”, immediately remember “no time value of money”. Common trap: Confusing simple payback with discounted payback or NPV.

Statement-wise Verification

• Statement 1 - Correct.
  It is the time taken for the cumulative energy savings to equal the initial investment.
  Payback measures the recovery time of the original investment from savings/cash inflows.
• Statement 2 - Correct.
  A shorter payback period indicates a more financially attractive project.
  As a screening rule: shorter recovery generally means lower capital exposure and is usually viewed as more attractive, all else equal.
• Statement 3 - Incorrect.
  Simple Payback Period (SPP) accounts for the "Time Value of Money"
  The defining limitation of simple payback is that it does not discount future cash flows and therefore ignores time value of money.

Core Concept

Simple payback is easy and useful for first screening, but it is not a complete profitability measure. It ignores cash flows after the payback date and ignores discounting. Discounted payback, NPV and IRR address time value more explicitly.

Formula / Key Relationship

If annual savings are uniform: SPP = Initial investment / Annual net savings. Discounted methods use PV = CF_t/(1+r)^t.

Step-by-Step Check

The definition validates 1, the decision rule supports 2, and the absence of discounting rejects 3. Option B.

Why the Other Options Are Wrong

Option A is incorrect because it omits correct statement(s) 2. Option C is incorrect because it includes incorrect statement(s) 3 and omits correct statement(s) 1. Option D is incorrect because it includes incorrect statement(s) 3.

Answer-Key Verification Note

The uploaded provisional key marks D . After independent technical verification, the defensible answer is B . This discrepancy is stated explicitly rather than silently copying the provisional key.

Exam Shortcut / Approach

Whenever a question says “simple payback”, immediately remember “no time value of money”.

Common Mistake

Confusing simple payback with discounted payback or NPV.

Quick Revision

Simple Payback and Time Value of Money is linked with Payback Period, Financial Evaluation and Energy Management. Whenever a question says “simple payback”, immediately remember “no time value of money”.