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Standard XII
Business Studies
Question

Which of the following is not a feature of payback period method?

  1. It does not consider the time value of money.
  2. It is very difficult to calculate.
  3. It is simply a method of cost recovery and not of profitability.
  4. It does not consider the risk associated with the projects.

A
It is very difficult to calculate.
B
It does not consider the time value of money.
C
It does not consider the risk associated with the projects.
D
It is simply a method of cost recovery and not of profitability.
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Solution
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Payback period basically pays attention to the speed at which the initial investment made in a project will be recovered by subsequent cash flows. The project which helps recoup the investment the fastest is considered to be the best project and that is the project that the firm must dedicate its resources to.
  • Easy to Calculate & Understand
Payback period is very easy to calculate and understand and does not require complex calculation. Therefore, it is not difficult to calculate.
Payback Period = Initial Investment/Cash Inflow per Period


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