Please explain the disadvantages of using the payback method of analysis for capital budgeting projects. What is a better alternative to use for the analysis?© BrainMass Inc. brainmass.com June 3, 2020, 6:45 pm ad1c9bdddf
Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment. The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Average Accounting Return (AAR), the Internal Rate of Return (IRR), and the Profitability Index (PI). These procedures will help rank the projects from the greatest investment to the worst.
Thus capital budgeting has following characteristics:
The exchange of current funds for future benefits.
The funds are invested in long-term assets.
This discusses the disadvantages of using the payback method of analysis for capital budgeting projects.