Payback is considered an unsophisticated capital budgeting technique because it _______. ### Understanding the Payback Period in Capital Budgeting**Question:**Payback is considered an unsophisticated capital budgeting technique because it _______.**Options:**- **a) gives explicit consideration to the timing of cash flows and therefore the time value of money** - **b) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate** - **c) does not give explicit consideration on the recovery of initial investment and possibility of a calamity** - **d) it ignores the time value of money (no compounding)****Explanation:****Option a:** This option suggests that the payback method does give consideration to the timing of cash flows and the time value of money. However, this is incorrect as the payback method does not account for the time value of money.**Option b:** This implies that the payback method would consider risk exposure and the use of cost of capital, which is also not true for the payback period calculation.**Option c:** Indicates the method does not consider the recovery of initial investment and the possibility of a calamity. This is also incorrect as the main purpose of the payback method is to determine how long it takes to recover the initial investment, even though it overlooks other risks and aspects.**Option d:** This is the correct answer. The payback period calculation ignores the time value of money because it does not discount future cash flows, making it an unsophisticated method for capital budgeting compared to other methods like Net Present Value (NPV) or Internal Rate of Return (IRR) which do account for the time value of money through compounding.By understanding these points, it becomes clear why the payback period is considered a basic and less sophisticated method in capital budgeting techniques. It provides a quick estimate of investment recovery time but lacks a comprehensive analysis of financial viability.

Capital budgeting is the method through which corporations make decisions of the acceptance and…

Payback is considered an unsophisticated capital budgeting technique because it a) gives explicit consideration to the timing of cash flows and therefore the time value of money b) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate c) does not give explicit consideration on the recovery of initial investment and possibility of a calamity d) it ignores the time value of money (no compounding)

Payback is considered an unsophisticated capital budgeting technique because it a) gives explicit consideration to the timing of cash flows and therefore the time value of money b) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate c) does not give explicit consideration on the recovery of initial investment and possibility of a calamity d) it ignores the time value of money (no compounding)

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

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