alleryStart learning →What does the payback period calculation ignore?
AThe time value of money
BThe name of the auditor
CThe size of the boardroom
DThe colour of the machine
Answer & Solution
Correct answer: A. The time value of money
1. Payback simply adds cash flows until the cost is recovered.
2. Money arriving in year four is treated as equal to money arriving in year one.
3. The payback period calculation ignores the time value of money.
4. That is the first of its listed shortcomings.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 16 'How Companies Think about Investing', sections 16.1-16.5_
Keep practising Capital Budgeting
Browse all Capital Budgeting questions for US CMA Part 2, or explore more Finance topics.
Related questions
Find the crossover rateWhich figure is higherSpot the false ruleLeave the strength standingAccept it or reject itThe discounted payback period improves on plain payback by first doing what to the cash flA machine costs $16,000 and the added cash inflow recovers that cost over four years. PaybThe NPV method and the profitability index method will always agree on: