Identify and describe the shortcomings of the payback period model or

Identify and describe the shortcomings of the payback period model or method (without discounting).

What will be an ideal response?

ANSWER

Answer: The payback period method ignores cash inflows after the initial outflow has been recovered. Thus, this method is biased toward those projects that have higher cash inflows in earlier years and against those with higher inflows in later years. The payback period has a fundamental flaw from a finance perspective: it fails to account for the time value of money. This problem can be easily corrected by adjusting to a payback period model with discounting.