Question
Which of the following is a disadvantage of the payback
period method in capital budgeting?Solution
The payback period method is a simple capital budgeting technique that measures the time required to recover the initial investment in a project. However, it ignores the time value of money, which means that it does not take into account the fact that money today is worth more than the same amount of money in the future due to inflation and the potential to earn a return on investment. As a result, it may lead to incorrect decisions regarding the selection of projects.
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