Question

Which of the following is NOT a limitation of the payback rule?A) It is difficult to calculate.B) It does not consider the time value of money.C) It does not consider cash flows occurring after the payback period.D) Lacks a decision criterion that is economically based.

Answer 1

C) It does not consider cash flows occurring after the payback period

Step-by-step explanation:

Although the payback period (payback rule) is a convenient and easy way of determining the break-even point of an investment (when will the cash inflows cover the initial expenditure), the truth is that it does not take into consideration what happens with the cash flows after the payback period.

For example, when comparing two investments with a similar payback period. It would be a mistake to immediately opt for the one with a lower payback period without assessing and determining the cash flows after the payback period for both of them.