The payback method is a popular way to analyze investment proposals.Required:A. Explain how the payback period is determined. Generally speaking, from a payback perspective, which projects are viewed to be the most attractive?B. Can the payback method take income taxes into consideration? Explain.C. What are the deficiencies of the payback method?
What will be an ideal response?
A. The payback period is the time required to recover the initial investment. Projects with the shortest payback are generally viewed as being the most attractive.
B. Yes, the payback period is based on net cash inflows to the firm, and can be computed either before taxes or after taxes.
C. There are two major deficiencies. The payback method ignores (1) cash flows that occur after the payback point has been reached and (2) the time value of money.
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