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Topic: BEC - Payback Method (

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cpa_punk
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Posted: 29 Nov 2011 at 09:19 \| IP Logged

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?

helencpa
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Posted: 29 Nov 2011 at 09:37 \| IP Logged

I think it is D, coz payback mtd doesn't show the profitability of an investment and breakeven pt is a pt where profit is zero and there is no way to find out through payback method, so i am guessing "D".
Let me know if there is another way of understanding this concept

vyom
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Posted: 29 Nov 2011 at 10:18 \| IP Logged

I too believe option "d" is the right answer...... Payback method doesn't
measure profitability, doesn't account for the time value of money and
ignores financial performance after the break-even period or point.

Break-even is the period when outflows equals inflows. Payback period says
nothing about how the investment performs after the break-even period.

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