The disadvantages of the payback approach include ____.
A) cash flows after the payback period are ignored in the calculation
B) payback ignores the time value of money
C) payback fails to provide an objective decision-making criterion
D) All of these are correct

Question

Quizplus · Accepted Answer

All of the given options are correct disadvantages of the payback approach. The payback approach simply focuses on the time taken to recover the initial investment without considering the cash flows generated after the payback period or the time value of money. This approach fails to provide an objective decision-making criterion as it only looks at recovering the initial investment within a specific timeframe, ignoring the potential profitability beyond that timeframe. Therefore, other methods like net present value (NPV) or internal rate of return (IRR) are preferred for investment decision-making as they provide a more comprehensive analysis of the potential profitability of an investment project.

The Disadvantages of the Payback Approach Include ____