Neither the payback period nor the ARR capital budgeting method recognizes the time value of money.

Question

Quizplus · Accepted Answer

The payback period and ARR (average rate of return) capital budgeting methods do not consider the time value of money, which is one of the major limitations of these methods. The time value of money refers to the fact that money received or paid out at different points in time has different values due to inflation and the potential to earn interest or returns. Methods such as net present value (NPV) and internal rate of return (IRR) take into account the time value of money and are therefore more accurate in evaluating investment decisions.

Neither the Payback Period nor the ARR Capital Budgeting Method