The following is a disadvantage of the payback period method:

The following is a disadvantage of the payback period method:

A. It is more complicated to calculate with unequal annual cash flows.

B. There is no consideration of cash flows after the payback period.

C. There is no consideration of the timing of cash flows.

D. Both A and B are disadvantages of this method.

Answer: D. Both A and B are disadvantages of this method.

The payback period method, despite the fact that it is computation friendly, has well known drawbacks. First of all, it becomes problematic when the annual cash inflows and outflows can vary in each year while if they are constant then it becomes much easier. This makes the analysis more complex because it is necessary to analyze our cash flows year by year until the initial investment is recouped from and thereafter start building up. Secondly and more importantly, this method does not even take into consideration any cash receipts for the period after the payback period has elapsed. This oversight can result in ineffective decision, say, a project that may initially give low returns but promising high returns later will not be considered let alone accepted because a project that makes much better returns in the short run is deemed better.