3. Which one of the following is not a problem of using the payback period?

4. A firm is starting a new project that will cost $200,000. It is projected to last 5 years and to generate cash flows of $50,000, $70,000, $90,000, $50,000 and $30,000 from Years 1 through 5 respectively. If the discount rate is 10%, what is the payback period of this project? Round to the second decimal place. Type only numbers without any unit ($, %, etc.)
Answer : 3 . Correct option is Consider all of the project's cash flows.
Reason :
Payback period Does not consider time value of money , Does not consider any required rate of return,and Firm cutoffs are subjective are the problems of payback period.
But Consider all of the project's cash flows is not a problem of payback period.
Answer : 4 Calculation of Payback Period
Below is the table showing calculation of payback period :
Year  Cash Flows  Cumulative Cash Flows 
1  50000  50000 
2  70000  120000 
3  90000  210000 
4  50000  260000 
5  30000  290000 
Payback period
= Complete years + (initial Investment  Remaining cash flows) / Cash flow of the year to be recovered
=2 years + (200000  120000) / 90000
=2.89 years
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