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Chapter 4: Q3DQ (page 405)

What are the weaknesses of the payback method?

Short Answer

Expert verified

Payback method ignore the timing of cash flows as well as cash flow received after payback period.

Step by step solution

01

Definition of payback period

Payback period is the technique used by the company to determine that how many time period an investment take to give back the invested amount.

02

Weakness of payback period

As per the present value or future value concept, value of money received is not same at all time but payback period is the did not consider the timing of the cash flow. Payback period also ignore the cash received after the payback period which is the part of the cash flow generated by the investment.

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