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Jemshah
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Asked: 2022-12-29T04:04:30+00:00 In:

State two disadvantages of using Pay-Back Period as a method of evaluating long term projects. (2 marks)July 2020

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State two disadvantages of using Pay-Back Period as a method of evaluating long term
projects. (2 marks)July 2020

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    Enlightened
    1. Ignores the time value of money: Payback period only considers the amount of time it takes for an investment to recoup its initial cost, and it does not take into account the time value of money. This means that it does not consider the fact that money has a different value at different points in time due to factors such as inflation and the opportunity cost of not investing it elsewhere.
    2. Does not consider cash flows after the payback period: Payback period only looks at the cash flows during the period of time it takes for the investment to pay back its initial cost, and it does not consider the cash flows that occur after the payback period. This means that it does not take into account the long-term profitability of the investment, which could be an important factor in evaluating its overall feasibility.
    3. Ignores risk: Payback period also ignores the risk associated with an investment, which can make it a less reliable method of evaluating long-term projects. For example, an investment with a shorter payback period may still be less attractive if it carries a higher level of risk compared to another investment with a longer payback period.
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