Question

A significant flaw in the payback method of capital budgeting is that____________ Group of answer choices it ignores cash flows following the payback period. it is calculated using arithmetic average instead of weighted moving average. it assumes future cash flows are reinvested at the IRR. it only calculates present values prior to comparing them to investment amount.

Answer 1

Answer:it ignores cash flows following the payback period

Explanation:

The payback method of budgeting does not  consider inflows of cash that occur beyond or following the payback period, thus ignoring the profitability of one project as compared to another in the sense that one project may be more valuable than another based on future cash flows.

Also, Many capital investments provide complexity of cash flows as a result of   investment returns over a period of many years, which also does not align with Payback method , because of this limitation, many businesses have adjusted by using their discretion to override this rule.