A disadvantage of using the payback period to compare investment alternatives is that:
A) It ignores cash flows beyond the payback period.
B) It includes the time value of money.
C) It cannot be used when cash flows are not uniform.
D) It cannot be used if a company records depreciation.
E) It cannot be used to compare investments with different initial investments.

Question

Quizplus · Accepted Answer

The payback period only takes into account the initial investment and cash flows up to the point of payback, ignoring any cash flows beyond that point. This means that it does not fully consider the long-term profitability or return on investment of the project.

A Disadvantage of Using the Payback Period to Compare Investment