Respuesta :
A major criticism of paybacks and the simple return method exists that both methods eliminate the time value of money. The payback period does not consider the impact of the time value of money in the capital budgeting process.
What is capital budgeting?
A business uses capital budgeting to decide which planned fixed asset purchases it should approve and which it should reject. Each proposed fixed asset investment is given a quantitative assessment through this procedure, providing a sound foundation on which to base a decision.
In corporate finance, capital budgeting and investment evaluation refer to the planning process used to assess whether a business should make long-term investments in new or replacement machinery.
The term "payback time" refers to the amount of years needed to recoup the initial monetary outlay. It is, in other words, the length of time that a machine, facility, or other investment has generated enough net income to pay its investment costs. In capital planning, the term "payback period" describes the amount of time needed to recover investment costs or to break even.
Hence, A major criticism of paybacks and the simple return method exists that both methods eliminate the time value of money. The payback period does not consider the impact of the time value of money in the capital budgeting process.
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