The correct answer is: A. Cash flow before depreciation and taxes
The payback period method is a simple method of investment analysis that measures the time it takes to recover the initial investment from the cash flows generated by an investment. The cash flows used in the payback period calculation are the cash flows before depreciation and taxes.
Depreciation is a non-cash expense that is used to allocate the cost of an asset over its useful life. Taxes are a cash expense that is paid to the government. Both depreciation and taxes reduce the amount of cash flow that is available to recover the initial investment.
Therefore, the cash flows used in the payback period calculation are the cash flows before depreciation and taxes. This is because these are the cash flows that are available to recover the initial investment.
Here is a brief explanation of each option:
- Option A: Cash flow before depreciation and taxes. This is the correct answer. The payback period method uses cash flows before depreciation and taxes to calculate the payback period.
- Option B: Cash flow after depreciation and taxes. This is not the correct answer. The payback period method does not use cash flows after depreciation and taxes.
- Option C: Cash flow after depreciation, but before taxes. This is not the correct answer. The payback period method does not use cash flows after depreciation, but before taxes.
- Option D: Cash flow before depreciation and after taxes. This is not the correct answer. The payback period method does not use cash flows before depreciation and after taxes.