CIMA BA2 · Chapter 12 · Question 8 of 13
Which of the following is a disadvantage of the PAYBACK method of investment appraisal?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) It ignores cash flows that arise after the payback period
Explanation
Payback considers only how quickly the initial investment is recovered and ignores all later cash flows, so it can reject highly profitable long-term projects. In its basic form it also ignores the time value of money. Simplicity, an emphasis on early returns and the use of cash flows are generally seen as advantages.
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