ACCA Financial Management (F9) Certification Practice Exam

What is an advantage of using the payback period method?

1. It accounts for the time value of money

2. It is simple to calculate and understand

3. It provides a long-term view of investment profitability

4. It integrates all possible future cash flows

The correct answer is: It is simple to calculate and understand

The payback period method is valued specifically for its simplicity and ease of understanding. It calculates the time required for an investment to generate enough cash flows to recover its initial cost. This straightforward approach makes the method accessible to those who may not have extensive financial analysis expertise. Using the payback period allows investors and managers to quickly assess the liquidity and risk associated with an investment. This method highlights the speed with which an investment can return cash, which is particularly useful in scenarios where cash flow timing plays a critical role in decision-making. In contrast, other methods may involve complex calculations or require a deep understanding of concepts like the time value of money. While options that focus on future cash flows or profitability can provide valuable insights, they do not match the immediacy and clarity offered by the payback period method. Hence, its primary advantage lies in how easily it can be applied and understood, aiding quick investment evaluations.