COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Does not take into account the time value of money
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It is quite simple to choose investment proposals
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Can be used to value two investment projects
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Detailed explanation-1: -Ignores the time value of money: The most serious disadvantage of the payback method is that it does not consider the time value of money. Cash flows received during the early years of a project get a higher weight than cash flows received in later years.
Detailed explanation-2: -The two major weaknesses of the payback method are: • the time value of money is not considered; • the cash flows after the investment is recovered are not considered. the time value of money is not considered; the cash flows after the investment is recovered are not considered.
Detailed explanation-3: -Payback Period and Capital Budgeting Unlike other methods of capital budgeting, the payback period ignores the time value of money (TVM). This is the idea that money is worth more today than the same amount in the future because of the earning potential of the present money.
Detailed explanation-4: -Answer and Explanation: The statement is true. The calculation of payback period takes into account all the cash flows of a project, but it does not discount them to the present value (in other words, it does not consider the time value of money).
Detailed explanation-5: -Answer and Explanation: The correct option is (c) The payback method provides the years needed to recoup the investment in a project.