Question

Which of the following is an advantage of the cash payback method?

a. It takes into consideration the time value of money.
b. It emphasizes accounting income.
c. It is easy to use.
d. It includes the cash flow over the entire life of the proposal.

Answer 1

Concepts and reason

Capital Budgeting: Capital Budgeting is the process involving estimation of the investments of funds. It estimates whether the fund invested is worth it. It includes purchase of fixed assets or any investment regarding capital expenses.

Revenues: The income or earnings received by a company for the goods and services delivered, are known as revenues. It is the income received by a company from its business operations.

Expenses: The costs borne by a company to produce and sell the goods and services to the customers are known as expenses

Fundamentals

Cash flow: Cash flow may be defined as the movement of cash. It comprises of cash inflow and cash outflow. It is used for operating activities of the company. It determines the liquidity status of the company.

Cash Payback method: Cash Payback method is a method used for evaluation of cash flows. It helps to assist the investment strategy and funding strategy. Payback period is the time for the evaluation process.

Payback period is the period which the capital invested is returned. It involves flow of cash. The income earned is considered for each year and thus the payback period is estimated easily.

Determination of advantage of cash payback method:

Cash payback method involves the analytic technique of the initial investment to be returned. It involves simple calculations and there is no complexity involved.

Thus, cash payback method is easy to use.

Ans:

An advantage of cash payback method is it is easy to use.