Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

Question

Quizplus · Accepted Answer

Both payback and accounting rate of return methods do not consider the time value of money, which is a key factor in financial decision making. The payback method only looks at the time taken to recover the initial investment, while the accounting rate of return method only considers the average expected annual profit as a percentage of the initial investment. Both methods do not take into account the present value of future cash flows or the opportunity cost of tying up funds in an investment, making them less accurate in evaluating the profitability of long-term projects.

Two Methods of Analyzing Potential Capital Investments-Payback and Accounting Rate