What is a weakness of the cash payback approach? (2024)

What is a weakness of the cash payback approach?

Note that the payback method has two significant weaknesses. First, it does not consider the time value of money. Second, it only considers the cash inflows until the investment cash outflows are recovered; cash inflows after the payback period are not part of the analysis.

What is the weakness of the cash payback approach?

The two major weaknesses of the payback method are: • the time value of money is not considered; • the cash flows after the investment is recovered are not considered.

Which of the following is a disadvantage of the cash payback?

A disadvantage of the cash payback technique is that it ignores the expected profitability of a project. The cash payback technique only measures the time taken for the investment to recover the initial cost or break even in a specific project.

What is one weakness of the payback period quizlet?

One weakness of the payback period is that it: ignores cash flows that occur after the end of the payback period.

What is a weakness of the payback method of project evaluation?

One of the main disadvantages of the payback period is that it ignores the time value of money. The payback period treats all cash flows as if they occur at the end of each year, without discounting them to their present value.

Which of the following is a disadvantage of the payback period approach?

There is no consideration of the timing of cash flows. Explanation: The payback period method is simple but does not take into consideration the timing of cash flows. For example, cash flows one year from today will be worth a different amount than the cash flow today due to the time value of money.

Which of the following is a disadvantage of the payback period rule quizlet?

it ignores cash flows after the cutoff date. True or false: The payback period takes into consideration the time value of money. One drawback of the payback period rule is that it does not take into consideration the time value of money.

What are 2 advantages and disadvantages of the cash payback technique?

The main advantages of Pay-back Period Method include its simplicity, ability to manage liquidity, risk assessment, and use as a planning tool. The primary disadvantages are its ignorance of profitability beyond the payback period, disregard of the time value of money, and subjective nature.

What are the advantages and disadvantages of the cash payback methods?

Payback period advantages include the fact that it is very simple method to calculate the period required and because of its simplicity it does not involve much complexity and helps to analyze the reliability of project and disadvantages of payback period includes the fact that it completely ignores the time value of ...

What is one disadvantage of the payback period method it ignores the time value of money?

Answer and Explanation:

The statement is true. The calculation of payback period takes into account all the cash flows of a project, but it does not discount them to the present value (in other words, it does not consider the time value of money).

What is one of the main disadvantages of the discounted payback period?

Both absolute and discounted payback method ignores profitability and Return on Investment: No business is interested only in break-even. Profitability and Returns are the key factors for any Capital budgeting decision, which is missing in the payback method.

What are the two main disadvantages of discounted payback?

Disadvantages of Discounted Payback Period

One limitation is that it doesn't take into account money's time value. This means that it doesn't consider that money today is worth more than money in the future. Another limitation is that it only looks at the cash flows from the project.

Which of the following is an advantage of the cash payback method?

Answer and Explanation:

The main advantage of the payback period is that it is easy to calculate and understand.

What is the main disadvantage of discounted payback is the payback method of any real usefulness in capital budgeting decisions?

Payback period also has some disadvantages as a capital budgeting method. First, it ignores the cash flows after the payback period. This means that it may reject projects that have lower payback periods but higher net present values or internal rates of return.

Which of the following are weaknesses of the payback method multiple select question?

Final answer:

The payback method is a capital budgeting technique that has four key weaknesses. It ignores cash flows received after the payback period, assumes all cash flows are included in the payback period, uses an arbitrary cutoff date, and disregards the time value of money principles.

What is a disadvantage of the payback period method for accepting and rejecting capital projects?

One of the biggest drawbacks of the payback period method is that it ignores the time value of money, which is the principle that money today is worth more than money in the future, due to inflation, interest rates, and opportunity costs.

What are the disadvantages of cash method?

Disadvantages of the cash method

It doesn't take into account liabilities and receivables, making it difficult to get the complete picture of your financial health. Not suitable for all businesses: Cash accounting is not applicable for your business if you offer credit to customers or maintain product inventory.

What is the cash payback technique?

To use the cash payback technique, simply divide the cost of the capital improvement or investment by the new money it is expected to generate or save every year. This should give you a result in years.

What are the disadvantages of payback period method compared to NPV?

Moreover, the payback period fails to consider the cash flows beyond the breakeven point, which can lead to suboptimal investment decisions. On the other hand, the NPV rule captures all the cash flows, enabling a more informed decision-making process.

What are the advantages and disadvantages of discounted payback?

It helps a company to determine whether to invest in a project or not. If the discounted payback period of a project is longer than its useful life, the company should reject the project. One of the disadvantages of discounted payback period analysis is that it ignores the cash flows after the payback period.

What are the main advantages and disadvantages of cash investments?

While cash offers liquidity, flexibility and the comfort of an emergency fund, it's essential to weigh its pros and cons against your financial objectives. While holding some cash is prudent, over-relying on it may hinder your potential for higher returns and fail to keep pace with inflation.

What does a negative payback period mean?

A positive number represents money the company has generated, while a negative number represents the funds the company hasn't recovered yet. Whether the yearly cash flow from an investment is positive or negative, you can use it in the payback period formula. Related: How To Create a Cash Flow Projection.

What is the principal weakness of the payback period rule when compared to the discounted cash flow method for project evaluation?

Note that the payback method has two significant weaknesses. First, it does not consider the time value of money. Second, it only considers the cash inflows until the investment cash outflows are recovered; cash inflows after the payback period are not part of the analysis.

What is a major disadvantage of using the payback period method to compare investment alternatives?

Answer and Explanation:

it ignores cash flows beyond the payback period. This is the correct option.

Which of the following is an advantage of the cash payback method quizlet?

Which of the following is an advantage of the payback method? Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk.