Question

What are the weaknesses of the cash payback approach? A. It uses accrual-based accounting numbers B. It ignores the time value of money C. It ignores the useful life of alternative projects D. Both (B) and (C) are true

Answer 1

D. Both (B) and (C) are true

Step-by-step explanation:

Cash payback approach is helpful to know the number of years, project would take to recover the initial investment. It could be calculated by dividing initial investment by cash flow per year. It is very simple and easy approach to compare projects and find number of years to recover the initial investment. The most serious weekness of cash payback approach is, it ignore the time value for the money, it also ignore project profitablity and project`s return on investment. As according to cash payback approach, it consider projects with short payback time as profitable and thus ignore useful life of alternative projects.