1.
The payback period method of capital budgeting:
A
Considers the time value of money
B
Ignores cash flows after the payback period
C
Is the most sophisticated capital budgeting technique
D
Accounts for profitability over the entire project life
Answer and explanation
Correct Answer: B — Ignores cash flows after the payback period
The correct answer is B: Ignores cash flows after the payback period.
The payback period method calculates how long it takes to recover the initial investment from net cash inflows. Its main limitation is that it ignores all cash flows occurring after the payback period and does not consider the time value of money. Discounted payback period is the modified version that accounts for time value.