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In: Accounting

Why are the payback and Accounting or Average Rate of Return sometimes refer as unsophisticated methodologies?

Why are the payback and Accounting or Average Rate of Return sometimes refer as unsophisticated methodologies?

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Expert Solution

The payback period is one of the most widely used tools for evaluating capital projects.The payback period represents the number of years it takes for the cash flows from a project to recover the project’s initial investment.Payback period is considered as unsophisticated methodologies because it does not account for time value of money.It does not consider cash flows past the payback period.It is biased against long term projects such as research and development and new product launches.

Accounting or Average Rate of Return is considered as unsophisticated methodologies because it also does not account for time value of money.It does not consider the external factors that are also affecting the profitability of project.Accounting or Average Rate of Return cannot be applied in a project where investments are made in parts and in real life, a lot of investmentss are made in parts.So, it is considered as unsophisticated methodologies.

ekkarill92 answered 1 year ago
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