Certified Professional In Financial Management (CPFM) [cpfm]

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Which of the following is a significant disadvantage of using the payback period as the sole method for capital budgeting decisions?

It is too complex to calculate for projects with uneven cash flows. It ignores the time value of money and cash flows occurring after the payback period. It focuses on accounting profits rather than cash flows. It consistently overestimates the project's total profitability.

Correct Answer:

It ignores the time value of money and cash flows occurring after the payback period.

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