Which of the following is a disadvantage of the payback

period method in capital budgeting?

A Ignores the time value of money Correct Answer Incorrect Answer

B Considers cash flows over the entire project life Correct Answer Incorrect Answer

C Easy to calculate and understand Correct Answer Incorrect Answer

D Considers profitability of the project Correct Answer Incorrect Answer

E Considers the risk associated with the project Correct Answer Incorrect Answer

Solution

The payback period method is a simple capital budgeting technique that measures the time required to recover the initial investment in a project. However, it ignores the time value of money, which means that it does not take into account the fact that money today is worth more than the same amount of money in the future due to inflation and the potential to earn a return on investment. As a result, it may lead to incorrect decisions regarding the selection of projects.

Practice Next

Relevant for Exams:

IIFCL Grade A

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