A significant disadvantage of the payback period is that it:
A. is complicated to explain.
B. increases firm risk.
C. does not properly consider the time value of money.
D. provides a measure of liquidity.
The payback period is one of the capital budgeting methods used to determine if a project should be selected based on the length of time to recover all initial costs.
Answer and Explanation:
- A significant disadvantage of the payback period is that it C. does not properly consider the time value of money.
The common disadvantages of the payback period are:
- Ignoring all cash flows after the cut-off point.
- Ignore the time value of money.
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 24