Evaluate the limitations of the payback period method in capital budgeting.
Understand the Problem
The question asks to evaluate the limitations of the payback period method in capital budgeting, providing options that highlight the drawbacks of this method.
Answer
B. It ignores cash flows beyond the payback period.
The limitations of the payback period method in capital budgeting include: B. It ignores cash flows beyond the payback period.
Answer for screen readers
The limitations of the payback period method in capital budgeting include: B. It ignores cash flows beyond the payback period.
More Information
The payback period method does not account for the time value of money and ignores profitability and cash flows after the payback period.
Tips
A common mistake is assuming the payback period considers all project cash flows and profitability.
Sources
- Limitations of Using a Payback Period for Analysis - Investopedia - investopedia.com
- Limitations of Payback Period - FasterCapital - fastercapital.com
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