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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Why would the cash payback method understate the attractiveness of a project with a large residual value?

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

In simple, the cash payback period is computed as follows:

Cash payback period =Initial costAnnual net cash inflow

To determine: The reason for which the cash pay back method understates the attractiveness of a project with a large residual value.

Explanation

The cash pay back method understates the attractiveness of a project because the cash payb...

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