Which of the following methods does NOT consider the investment's profitability?

• A. Net present value (NPV) method
• B. Profitability index method
• C. Internal rate of return (IRR) method
• D. Payback period method

Answer: (D)

Verified step by step guidance

1. Understand the concept of the Payback Period method: The Payback Period method calculates the time required to recover the initial investment from the cash inflows generated by the investment. It focuses solely on the time aspect and does not consider the profitability or the time value of money.
2. Compare the Payback Period method with other methods: The Net Present Value (NPV), Profitability Index, and Internal Rate of Return (IRR) methods all incorporate profitability and the time value of money in their calculations, making them more comprehensive in evaluating investments.
3. Recognize the limitation of the Payback Period method: Since the Payback Period method does not account for cash flows beyond the payback period or the time value of money, it does not provide a measure of the investment's overall profitability.
4. Identify why the Payback Period method is the correct answer: Among the listed methods, only the Payback Period method disregards profitability, making it distinct from the other methods that evaluate the financial viability of an investment.
5. Conclude the reasoning: The Payback Period method is focused on recovering the initial investment quickly, but it does not assess whether the investment is profitable in the long term, which is why it does not consider profitability.