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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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The payback period suffers from which of the following deficiencies?

  1. a. It is a rough measure of the uncertainty of future cash flows.
  2. b. It helps control the risk of obsolescence.
  3. c. It ignores the uncertainty of future cash flows.
  4. d. It ignores the financial performance of a project beyond the payback period.
  5. e. Both c and d.

To determine

Identify the deficiencies of payback period.

Explanation

Payback Period:

The time taken by an investment to recover its original value is known as payback period. It is calculated by dividing the original amount of investment by annual cash flow from the investment.

d.

The payback method does not consider the cash flow beyond the payback period. Therefore, option d is correct.

a.

Payback method is a rough method of uncertain future cash flows...

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