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A primary limitation of the Payback Period method is:
AIgnores cash flows beyond the payback period and time value of money
BConsiders time value of money
CDifficult to compute
DAlways gives wrong results
Answer & Solution
Correct answer: A. Ignores cash flows beyond the payback period and time value of money
1. Simple Payback ignores cash flows after the payback period.
2. It also ignores the time value of money.
3. Strength: simplicity and liquidity proxy. Weakness: not value-maximising.
_Source: ICAI BoS CA Inter Paper 6A, Ch 7 "Investment Decisions", §6 — Payback_