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 are the main weaknesses of payback period?

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.

Which of the following are weaknesses of the payback method?

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.

What are the problems with the payback method?

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.

What is the major difficulty of the cash payback method?

It focuses only on the time it takes to recoup the initial investment and ignores any cash flows that occur after the payback period. This can lead to ignoring the profitability of a project in the long run. The method does not consider the profitability of the project.

What is a weakness of the payback method quizlet?

One of the main reasons why the discounted payback period is not widely used by managers is that: it ignores all cash flows that occur after the arbitrary cutoff period.

What is the payback method what are its main strengths and weaknesses?

The payback period is the amount of time it is expected to take to recoup (in the form of expected cash inflows or outflows) the net initial investment of a project. It's weaknesses are that it does not account for TVOM, and it does not account for cash flows that take place after the payback period ends.

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

Cash Payback Method is a capital budgeting formula that shows us how long it will take for a return on investment to pay or pay back the initial investment. A disadvantage of the cash payback technique is that it ignores the time value of money.

What is one weakness of the payback method of project analysis?

Limitations of Payback Period Analysis

The first is that it fails to take into account the time value of money (TVM) and adjust the cash inflows accordingly. The TVM is the idea that the value of cash today will be worth more than in the future because of the present day's earning potential.

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 the cash payback method?

Simply put, the cash payback technique involves dividing the total cost of the upgrade by the amount of money that the upgrade will make every year. This gives us the cash payback period, or the amount of time we have to wait to see the item pay for itself.

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 the weakness of discounted payback?

It does not consider the whole life of the project and ignores the cash flows generated after the payback period. DPP does not directly indicate whether to accept or reject the project like other investment techniques like NPV (a project with positive NPV is viable). The profit of the project is ignored.

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 a weakness of the payback method for evaluating an investment?

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 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.

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 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.

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.

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 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.

What are the disadvantages of NPV method?

Its disadvantages are that it relies on accurate estimates of future cash flows and discounted rates, which can be uncertain, and it can be complex to understand and calculate.

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