[Anonymous]

What is the limitation of Payback Method?

a. cost of capital

b. cash inflows

c. cash outflows

d. break even point

I don’t have answers since my friend asked me. what do you think?

[NYC_CPA]

I would say Breakeven point since the payback method measures an investment in terms of how long it takes to recoup the INITIAL investment. Since the payback method ignores cash flow after initial investment, answer A & B wouldn't be correct.

"I hate every minute of training, but I said, DON'T QUIT. Suffer now and live the rest of your life as a champion" - Muhammed Ali
FAR: 65(11/10), 80(02/11->Yaeger Audio!)
AUD: 73(05/15/11 Yaeger Homestudy), retake 76(08/31/11)
BEC: 73(08/05/11) Yaeger Homestudy, 71(11/30/11), retake 80(04/20/12)
REG: 80 (11/15/11) Yaeger Homestudy

[sbarkerACPA]

Hmm. I think the answer is A. Payback deals with the time it will take to recoup the investment. It takes into account the initial investment (Cash outflow) and annual savings (cash inflow). Breakeven doesn't deal with this topic at all. Payback method does not take into account the cost of capital or the % return on the investment, which NPV and IRR do.

BEC: 74;81
AUD: 77
REG: 71; 80
FAR: 78
License for CPA----APPROVED
CPA Class of 2013

[Michelle0622]

Hi, I also meet this problem when I test the exam. I also have no idea. But I was struggling with A and D, and finally choose A. Because the breakevern point has nothing to do with this topic. But i realize I might wrong because I used Becker as the reviewing material. Look at the information I got from the Investopedia

There are two main problems with the payback period method:

1. It ignores any benefits that occur after the payback period and, therefore, does not measure profitability.

2. It ignores the time value of money.

Obviously, becker did not cover the topic of profitability or overlook the time value of money, and did not mention too much of profitability. Feel very disappointed for Becker this time. And some other questions relative to IT, i never hear about them in Becker test bank.

Have no idea what is my performance of this exam.

[Michelle0622]

Just check it another website FREE MBA said: It overlooks the cost of capital; i.e., interest factor which is a important consideration in making sound investment decisions.

Overlook means ignore, but the explanation seems like cost of capital is important. have lost

[Author]

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