Question

Which of the following statements indicates a disadvantage of using the regular, or conventional, payback period for capital budgeting decisions? Check all that apply. A. The payback period does not take into account the cash flows produced over a project’s entire life. B. The payback period does not take into account the time value of money effects of a project’s cash flows. C. The payback period is calculated using net income instead of cash flows.

Answer 1

Answer:

A. The payback period does not take into account the cash flows produced over a project’s entire life. B. The payback period does not take into account the time value of money effects of a project’s cash flows.

Explanation:

The payback period method calculates the amount of time that is taken to recoup an investment made on a project.

Payback period is calculated using cash flows.

The disadvantages of payback period are :

1. It doesn't take into consideration the time value of money.

2. It doesn't take into account the cash flows after original investment has been recouped.

The discounted payback corrects for these disadvantages by using a discounted cash flow.