Chapter 26, Problem 5DQ

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

In simple, the cash payback period is computed as follows:

$\text{Cash payback period =}\frac{\text{Initial cost}}{\text{Annual net cash inflow}}$

To determine: The reason for which the cash pay back method understates the attractiveness of a project with a large residual value.