Question

Payback is considered an unsophisticated capital budgeting because it ________. gives explicit consideration to the timing of cash flows and therefore the time value of money. gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate. does not gives explicit consideration on the recovery of initial investment and possibility of a calamity. it does not explicitly consider the time value of money.

Answer 1

The answer to the question is (D) it does not explicitly consider the time value of money.

Payback means the amount of money a company will receive after a project has been completed over a certain amount of time. Its disadvantage lies in the fact that cash flows received during the early years of a project gets a higher weight than cash flows received in later years.