"The payback period analysis ignores differences in the timing of cash flows". Give your own example...

"The payback period analysis ignores differences in the timing of cash flows". Give your own example to explain the statement.

Expert Solution

Answer:

The payback period has some huge disadvantages. The first is that it neglects to consider the time value of money (TVM) and modify the money inflows in like manner. The TVM is the possibility that the estimation of money today will be worth more than later on in light of the current day's gaining potential.

For example, an inflow of $100,000 from a project venture that happens in the tenth year (say) following the year in which the initial investment is made is seen as having a similar value as a $100,000 money that happened in the year the project venture was made regardless of the real situation where due to the influence of time value of money (purchasing power) $100,000 is likely to be lower following the ten years.

Moreover, the payback period neglects the inflows of money that happen after the payback period, accordingly neglecting to look at the general benefit of one task when compared with another.

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