A 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

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Payback period only looks at how quickly an investment will recoup its initial cost, without taking into account the time value of money or the potential for long-term profitability. Therefore, it does not consider the impact of a project on the value of the firm or its ability to generate sustainable cash flows over time. As a result, it cannot provide guidance on whether a project will create value for shareholders or whether a longer or shorter payback period would be more optimal.

A Major Weakness of Payback Period in Evaluating Projects Is