The major weakness of payback period in evaluating projects is that it cannot specify the appropriate payback period in light of the wealth maximization goal.

Question

Quizplus · Accepted Answer

The payback period method only focuses on how long it takes to recover the initial investment without considering the time value of money and the future cash flows beyond the payback period. As a result, it fails to consider the profitability and risk of the project, which are crucial for determining the value of the investment in terms of increasing the shareholders' wealth. Therefore, it is not a reliable method for evaluating projects when the goal is wealth maximization.

The Major Weakness of Payback Period in Evaluating Projects Is