The payback method ignores cash flows after the payback period, whereas the rate of return includes them.

Question

Quizplus · Accepted Answer

The payback method focuses solely on the time it takes to recover the initial investment, ignoring any cash flows that occur after this period. In contrast, the rate of return method (or internal rate of return, IRR) considers all cash flows over the entire life of the project, including those beyond the payback period.

The Payback Method Ignores Cash Flows After the Payback Period