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A significant disadvantage of the payback period is that it: A. is complicated to explain. B....

Question:

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.

Payback Period:

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:

  1. Ignoring all cash flows after the cut-off point.
  2. Ignore the time value of money.

Learn more about this topic:

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How to Calculate Payback Period: Method & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 24
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