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Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions?
A. The payback period does not take the time value of money into account.
B. The payback period is calculated using net income instead of cash flows.
C. The payback period does not take the project’s entire life into account.

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Answer:

A & C are correct

Explanation:

Payback period is a capital budgeting technique used to determine the number of years it would take a project cash inflows to fully recover the initial amount invested. Since it involves basic addition of subsequent expected cash inflows to determine at what point in time the balance changes from negative to positive ,regular payback period does not take into account the time value of money.

Additionally, payback period determination ignores future cashflows after the balance has changed from negative to positive. Due to this reason, it does not take into account the project's entire life.

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