Compare the payback period method with other investment appraisal techniques like NPV and IRR.
Understand the Problem
The question is asking to compare the payback period method with other investment appraisal techniques such as NPV (Net Present Value) and IRR (Internal Rate of Return), considering their strengths and weaknesses in evaluating investment profitability and liquidity.
Answer
B. NPV and IRR provide a comprehensive measure of profitability, while the payback period focuses on liquidity.
The correct answer is B. NPV and IRR provide a comprehensive measure of profitability, while the payback period focuses on liquidity.
Answer for screen readers
The correct answer is B. NPV and IRR provide a comprehensive measure of profitability, while the payback period focuses on liquidity.
More Information
The payback period is simple and focuses on recovering initial investment quickly, but it ignores the time value of money and does not provide a full measure of a project's total profitability, unlike NPV and IRR.
Tips
A common mistake is to think that the payback period accounts for the time value of money, which it does not.
Sources
- Comparison Of Payback Period With Other Investment Evaluation ... - fastercapital.com
- Investment Appraisal Techniques | PBP, ARR, NPV, IRR, PI | eFM - efinancemanagement.com
