Which of the following is a limitation of the Payback Period method?

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Question: Which of the following is a limitation of the Payback Period method?

Options:

Correct Answer: It ignores cash flows after the payback period

Solution:

A limitation of the Payback Period method is that it ignores cash flows that occur after the payback period.

Which of the following is a limitation of the Payback Period method?

Which of the following is a limitation of the Payback Period method?

Step 1: Understand what the Payback Period method is. It is a way to measure how long it takes to recover the initial investment from cash flows.
Step 2: Recognize that the Payback Period only looks at cash flows that happen until the initial investment is paid back.
Step 3: Identify the limitation: The method does not consider any cash flows that happen after the payback period is reached.
Step 4: Realize that this means important future profits or losses are ignored, which can lead to poor decision-making.

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