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Four of the following statements are truly disadvantages of the regular payback method, but one is...

Four of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method. Which one is NOT a disadvantage of the payback method? a. Ignores cash flows beyond the payback period. b. Does not directly account for the time value of money. c. Does not provide any indication regarding a project’s liquidity or risk. d. Lacks an objective, market-determined benchmark for making decisions. e. Does not take account of differences in size among projects.

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Answer #1

C is the correct answer.

Regular payback method gives the outcome in the number of years a project will take to return the initial investment made. It considers undiscounted cash flows and hence ignores the time value of money. Also, it doesn't take into account the different sizes of the projects as the outcome is simply the number of years a project will take to regenerate the initial cash outflow. However, payback method can give a quick observation regarding the liquidity of project since the lesses the payback period is, the more liquid it is.

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