Question

One way to compare potential investments is to compute and compare their payback periods. The payback period is an estimate of the expected time before the cumulative net cash inflow from the investment equals its initial cost. A payback period analysis fails to reflect risk of the cash flows, differences in the timing of cash flows within the payback period, and cash flows that occur after the payback period.

All of the following are weaknesses of the payback period: (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
a. it uses cash flows, not income,
b. it is easy to use.
c. it ignores all cash flows after the payback period.
d. it ignores the time value of money.

Answer 1

C

D

Step-by-step explanation:

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Payback period = Amount invested / cash flow

Assume 100,000 is invested and cash flow is 10,000 for 50 years

payback is 10 years

Cash flow after the 1oth year is ignored.

Also, the time value of cash flows are ignored. unlike, net present value method and the IRR method