What is a disadvantage of the cash payback technique? (2024)

What is a disadvantage of the cash payback technique?

Answer and Explanation:

What are the disadvantages of payback method?

KEY POINTS
  • Payback ignores the time value of money.
  • Payback ignores cash flows beyond the payback period, thereby ignoring the "profitability" of a project.
  • To calculate a more exact payback period: Payback Period = Amount to be Invested/Estimated Annual Net Cash Flow.

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

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.

What is the major difficulty of the cash payback method?

There is one problem with the payback period calculation. Unlike other methods of capital budgeting, the payback period ignores the time value of money (TVM). This is the idea that money is worth more today than the same amount in the future because of the earning potential of the present money.

What are two 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 technique?

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 ...

Which of the following is a disadvantage of the payback method quizlet?

Which of the following is a disadvantage of the payback method? It is inconsistent with the goal of maximizing shareholder wealth.

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 are the two main disadvantages of discounted payback?

Disadvantages of Discounted Payback Period

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. It doesn't consider other factors such as risk or profitability.

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.

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

One of the disadvantages of discounted payback period analysis is that it ignores the cash flows after the payback period. Thus, it cannot tell a corporate manager or investor how the investment will perform afterward and how much value it will add in total. It may lead to decisions that contradict the NPV analysis.

What is the flaw or weakness with the payback period method?

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.

Is the cash payback technique a quick way?

Transcribed image text: The cash payback technique is a quick way to calculate a project's net present value. o period is calculated by dividing the annual cash inflow by the cost of the capital investment.

What are 2 disadvantages of paying with cash?

The disadvantages of cash:
  • Hygiene concerns. Coins and banknotes exchange hands often. ...
  • Risk of loss. Cash can be lost or stolen fairly easily. ...
  • Less convenience. ...
  • More complicated currency exchanges. ...
  • Undeclared money and counterfeiting.
Mar 14, 2024

What are the disadvantages and advantages of cash?

The advantages of cash payments include simplicity and immediate availability, while disadvantages include the risk of theft and lack of traceability. Advantages of cash payments include anonymity and immediate availability. Disadvantages include risk of theft and lack of digital record keeping.

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

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.

What is one weakness of the payback period quizlet?

One weakness of payback is its failure to recognize cash flows that occur after the payback period. A project must be rejected if its payback period is less than the maximum acceptable payback period.

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

1 Ignoring time value of money

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.

Which of the following is the one disadvantage to using the payback period method of project evaluation that Cannot be avoided?

Answer and Explanation:

The payback period ignores the concept of the time value of money, the future cash flows are not discounted to their present worth but are used at their face value.

What is the disadvantage of using the regular payback period not the discounted payback period for capital budgeting decisions?

Answer and Explanation:

Explanation: The main disadvantage of the payback period is the ignorance of the time value of money in the computations. As a result, the outcome is not in the present value terms and is, therefore, misleading. To overcome this drawback, a discounted payback period has been created.

What is the advantage of the cash payback method?

The most significant advantage of the payback method is its simplicity. It's an easy way to compare several projects and then to take the project that has the shortest payback time.

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. The calculations include calculating the cumulative balance of the project until the initial cost is paid off.

Which of the following is an advantage of the cash payback method group of answer choices?

Correct Answer: Option d. It is easy to use.
b. It emphasizes accounting income.It emphasizes annual cash flows.
c. It takes into consideration the time value of money.It does not consider the time value of money, which is a disadvantage.
d. It is easy to use.The cash payback method is very easy to use and is an advantage.
2 more rows

What is the disadvantage of a payback period quizlet?

The worst problem associated with payback period is that it ignores the time value of money. In addition, the selection of a hurdle point for payback period is an arbitrary exercise that lacks any steadfast rule or method.

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