Managerial Accounting: Cash Payback Method Objections

This essay discusses the principal objections to using the cash payback method for evaluating capital investment proposals. It highlights the method's simplicity but also its major drawbacks, such as ignoring the time value of money and failing to consider cash inflows beyond the payback period. The essay uses an example to illustrate how the method does not account for the changing purchasing power of money over time. It also references academic sources to support its arguments.

Running head- Managerial Accounting
managerial accounting

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Managerial Accounting
Discuss the principal objections to the use of the cash payback method for evaluating capital
investment proposals.
Using the cash payback method and formula to evaluate the capital investment proposal is very
easy and simple. Basically, the payback period means the time which is required for the amount
invested in the project to be get repaid. It so simple and easy to calculate.
In spite of its simplicity, it carries major drawback and objections.
The first objection is that it ignores to consider the time value of money
The second objection is that it fails to take inflows of cash that will occur beyond the payback
time.
In real capital investment is not considered to put or invest a huge amount into the project and
get inflows of cash over a period rather in capital investment additional cash may also require
putting into the investment so here the inflows may vary and fluctuate as par the sales or the
revenues. So here in this method, the time value of money is ignored which is not appropriate.
For example- investment in capital made with $ 100 in the year 2017 and its inflows in the year
2019 will be $100 or $120, so according to payback period here, it will fail to consider the real-
time value of money which has been invested in 2017 and its returns on 2019. As the purchasing
power of $ 100 in the year, 2017 was greater than the purchasing power of $120 in the year
2019.

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Managerial Accounting
References
Hull, J. C. (2014). The evaluation of risk in business investment. Elsevier.
Götze, U., Northcott, D., & Schuster, P. (2015). Capital Budgeting and Investment Decisions.
In Investment Appraisal (pp. 3-26). Springer, Berlin, Heidelberg.