Evaluating the Limitations of Payback Periods as an Investment Appraisal Measure

The video tutorial discusses the investment appraisal measure of payback periods, highlighting its focus on the timing of cash flows rather than profitability. Through a comparison of two projects, it illustrates how payback periods can lead to short-term investment decisions, potentially overlooking more profitable long-term opportunities. The tutorial emphasizes the importance of considering both advantages and disadvantages of payback periods in investment decisions.

What is a major limitation of the payback period as an investment appraisal measure?

• It requires a long time to interpret.

• It focuses on the profitability of projects.

• It is too complex to calculate.

• It emphasizes the timing of cash flows over profitability.

In the example provided, why is Project B chosen over Project A using the payback period approach?

• Project B has a higher total return.

• Project B has a lower initial cost.

• Project B is more profitable in the long term.

• Project B pays back the initial investment faster.

What is the total profit generated by Project A over five years?

• 3 million pounds

• 0.5 million pounds

• 2 million pounds

• 1 million pounds

How does the payback period approach potentially affect business decision-making?

• It encourages long-term investments.

• It leads to a focus on short-term goals.

• It ensures maximum profitability.

• It reduces the risk of investment.

What might cause a business to choose a less profitable project using the payback period approach?

• Instructions to invest in projects with a short payback period.

• A focus on maximizing long-term profits.

• A strategy to diversify investments.

• A need to reduce initial investment costs.

What is one advantage of the payback period method?

• It focuses on long-term profitability.

• It is simple to understand.

• It is complex to calculate.

• It is difficult to interpret.

Why is it important to consider other appraisal measures alongside the payback period?

• To capture more lucrative long-term investments.

• To simplify the investment decision process.

• To ensure a focus on short-term goals.

• To reduce the complexity of calculations.