Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 184

Which of the following cost of capital methods identifies the time period required to recover the cost of the capital investment from the annual inflow produced?

Answer options

• A. Cash payback technique.
• B. Annual rate of return technique.
• C. Internal rate of return method.
• D. Net present value method.

Correct answer: A

Explanation

The Cash payback technique is the only method that directly calculates the time it takes to recover an investment through cash inflows. The Annual rate of return technique focuses on the percentage return on investment rather than recovery time, while the Internal rate of return method and Net present value method evaluate profitability over the entire life of the investment, not just the payback period.