Question

. What are the two primary drawbacks to the payback period method?

Answer 1

The two primary drawbacks to the payback period method are:

1. It does not consider time value of money into the cash flows of project which is not a correct approach to follow.

2. It also ignores the cash flows after the payback period of the project which can tell us wrong decision to be made.

Because in some cases there may be large amount of cash flow at the beginning of the project or during the last phase of the project which would give an opposite and very wrong solution to problem leading to wrong decision made.