**Ignores the time value of money**: The most serious disadvantage of the payback method is that it does not consider the time value of money. Cash flows received during the early years of a project get a higher weight than cash flows received in later years.

Which one is a disadvantage of the payback method quizlet?

One drawback of the payback method is that **some cash flows may be ignored**. One of the disadvantages of the payback method is that it ignores time value of money. Project Alpha has an internal rate of return (IRR) of 15 percent. Project Beta has an IRR of 14 percent.

**What are the advantages and disadvantages of payback method?**

Payback period advantages include the fact that **it is very simple method to calculate the period required and because of its simplicity it does not involve much complexity and helps to analyze the reliability of project** and disadvantages of payback period includes the fact that it completely ignores the time value of …

**Which of the following is a disadvantage of the discounted payback method?**

One of the disadvantages of discounted payback period analysis is that **it ignores the cash flows after the payback period**.

**What are the two main disadvantages of discounted payback?**

Disadvantages. Calculation of payback period using discounted payback period method **fails to determine whether the investment made will increase the firm’s value or not**. It does not consider the project that can last longer than the payback period. It ignores all the calculations beyond the discounted payback period.

## Which of the following disadvantages of the payback period is addressed by using the discounted payback period method?

What are the problems associated with using the discounted payback period to evaluate cash flows? The primary disadvantage to using the discounted payback method is that **it ignores all cash flows that occur after the cutoff date**, thus biasing this criterion towards short-term projects.

## What are some of the disadvantages of using the IRR method?

Limitations Of IRR

**It ignores the actual dollar value of comparable investments**. It does not compare the holding periods of like investments. It does not account for eliminating negative cash flows. It provides no consideration for the reinvestment of positive cash flows.

## What are the criticisms of payback period?

A major criticism of the payback period method is **that it ignores the “time value of money**,” the principle that describes how the value of a dollar changes over time. A project that costs $100,000 upfront and generates $10,000 in positive cash flow per year has a payback period of 10 years.

## What are the major disadvantages of the net present value method?

The biggest disadvantage to the net present value method is that **it requires some guesswork about the firm’s cost of capital**. Assuming a cost of capital that is too low will result in making suboptimal investments. Assuming a cost of capital that is too high will result in forgoing too many good investments.

## What are the advantages and disadvantages of the net present value method?

Advantages and disadvantages of NPV

NPV Advantages | NPV Disadvantages |
---|---|

Incorporates time value of money. | Accuracy depends on quality of inputs. |

Simple way to determine if a project delivers value. | Not useful for comparing projects of different sizes, as the largest projects typically generate highest returns. |

## What is the main disadvantage of discounted payback is the payback method of any real usefulness in capital budgeting decisions?

Disadvantages of the Payback Method

Ignores the time value of money: The most serious disadvantage of the payback method is that **it does not consider the time value of money**. … Ignores a project’s profitability: Just because a project has a short payback period does not mean that it is profitable.

## Which of the following statements indicate a disadvantage of using the regular payback period?

Correct Answer: Option C. The payback period does not take the time value of money into the account. Explanation: The main disadvantage of the payback period is **the ignorance of the time value of money in the computations**.

## What are the advantages and disadvantages of accounting rate of return?

What are the advantages and disadvantages of using the accounting rate of return?

Advantages | |
---|---|

2 | It is easy to calculate and understand the payback pattern over the economic life of the project |

3 | It shows the profitability of an investment and helps to measure the current performance of the project |

## What are the main disadvantages in the use of the internal rate of return IRR method in analyzing capital investment proposals?

A disadvantage of using the IRR method is that **it does not account for the project size when comparing projects**. Cash flows are simply compared to the amount of capital outlay generating those cash flows.

## What is the major disadvantage to NPV and IRR?

Disadvantages. **It might not give you accurate decision when the two or more projects are of unequal life**. It will not give clarity on how long a project or investment will generate positive NPV due to simple calculation.

## Which of the following is a disadvantage of using internal rate of return for assessing a project quizlet?

Which of the following is a disadvantage of using internal rate of return for assessing a project? **It discriminates heavily against long term and risky projects.**

## What is the major criticism of the payback and simple rate of return methods of making capital budgeting?

A major criticism of paybacks and the simple return method is **that both ways eliminates the time value of money**.

## What weaknesses are commonly associated with the use of the payback period to evaluate a proposed investment?

The weaknesses of using the payback period are (1) no explicit consideration of shareholders’ wealth, (2) failure to take fully into account the time value of money, and (3) **failure to consider returns beyond the payback period** and hence overall profitability of projects.

## What are the advantages disadvantages of NPV and payback as methods of investment appraisal?

The advantages of the net present value includes **the fact that it considers the time value of money and helps the management of the company in the better decision making** whereas the disadvantages of the net present value includes the fact that it does not considers the hidden cost and cannot be used by the company for …

## Which of the following is a disadvantage of venture capital?

20 Venture Capital Advantages and Disadvantages

PROS | CONS |
---|---|

Help managing risk is provided |
Finding investors can distract founders from their business |

Monthly payments are not required | Funding is relatively scarce and difficult to obtain |

Personal assets don’t need to be pledged | The overall cost of financing is expensive |

## What are advantages of NPV method over simple payback period method?

As far as advantages are concerned, the payback period method is **simpler and easier to calculate for small, repetitive investment and factors in tax and depreciation rates**. NPV, on the other hand, is more accurate and efficient as it uses cash flow, not earnings, and results in investment decisions that add value.

## What does a negative NPV mean?

If the calculated NPV of a project is negative (<, 0), **the project is expected to result in a net loss for the company**. As a result, and according to the rule, the company should not pursue the project.

## Which of the following statements indicate a disadvantage of using the discounted payback period quizlet?

Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? **Check all that apply**. The discounted payback period does not take into effect the time value of money effects of a project’s cash flows.

## Which of the following methods can lead to conflicting decisions in capital budgeting?

The **NPV and IRR methods** can lead to conflicting decisions for mutually exclusive projects because of CF timing and size differences between projects. Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions?

## Which of the following statements best describes the difference between the IRR method and the MIRR method?

which of the following statements best describes the difference between the IRR method and the MIRR method? **the IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR.** **the MIRR method assumes that cash** flows are reinvested at a rate of return equal to the cost of capital.

## What is the main disadvantage of the annual rate of return method?

A disadvantage of the yearly rate of return is that **it only includes one year and does not consider the potential for compounding over many years**.

## Which among is the disadvantage of average rate and return method?

According to Corporate Finance Institute, the biggest drawback in using the average accounting return method is **it does not take into account the time value of money**. This is the concept that money is worth a known amount today, but there is no certainty what the same amount of money will be worth in the future.

## Which of the following is a disadvantage of the profitability index?

A major disadvantage of profitability index is that **it may lead to incorrect decision when comparing mutually exclusive projects**. These are a set of projects for which at most one will be accepted, the most profitable one.

## Which of the following is a disadvantage of the accounting rate of return method quizlet?

The main disadvantage with the accounting rate of return-method is that **it uses accounting numbers (instead of cash-flows) and does not consider the time value of money**.

## Which of the following is not an advantage of the accounting rate of return method of investment appraisal?

The correct answer is d. **It takes into consideration the time value of money**. This method disregards the time value of money.

## Which of the following is a drawback to the present value method quizlet?

The net present value method has the following two disadvantages: **It has more complex computations than methods that don’t use present value**. It assumes the cash flows can be reinvested at the minimum desired rate of return, which may not be valid.