Which of the following is an advantage of the cash payback method when evaluating investments in securities?

• A. It is simple to compute and easy to understand.
• B. It considers the time value of money.
• C. It measures profitability over the entire life of the investment.
• D. It requires detailed future cash flow projections.

Answer: (A)

Verified step by step guidance

1. Understand the cash payback method: The cash payback method is a technique used to evaluate investments by determining the time it takes for the initial investment to be recovered through cash inflows. It is often used for its simplicity and ease of computation.
2. Analyze the advantages of the cash payback method: The method is straightforward to compute and easy to understand, making it accessible for decision-making without requiring complex calculations.
3. Consider the limitations of the cash payback method: Unlike methods such as Net Present Value (NPV), the cash payback method does not account for the time value of money, which is a critical factor in financial decision-making.
4. Evaluate profitability over the investment's life: The cash payback method focuses only on the period required to recover the initial investment and does not measure profitability over the entire life of the investment.
5. Assess the need for detailed cash flow projections: The cash payback method does not require detailed future cash flow projections, as it only considers the cash inflows until the initial investment is recovered.