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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

Which is a recognised limitation of the payback period method?

Payback ignores cash flows occurring after the payback period. It only measures how fast the initial outlay is recovered, so it can reject projects with large later returns. It also ignores the time value of money.

  1. AIt cannot be computed when inflows are uniform
  2. BIt ignores cash flows arising after the payback periodCorrect
  3. CIt uses accounting profit instead of cash flow
  4. DIt requires a cost of capital for computation

Explanation

Payback only measures time to recover the outlay and disregards later inflows, so a project with large later returns may be rejected. It is simple to compute with uniform inflows, uses cash flows, and needs no discount rate; hence the other options are incorrect.

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