Which Three of the Following Are Drawbacks of Payback

question 21

Multiple Choice

Which three of the following are drawbacks of payback?

• A) Cash flows beyond the payback cut- off are ignored.
• B) The cut- off point is arbitrarily selected: it has no theoretical base.
• C) It is difficult to calculate and interpret.
• D) It fails to allow for the time value of money.

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Definitions:

Substitution

The economic principle describing how consumers or producers replace one good or service with another in response to changes in price or other factors.

Substitution Effect

The substitution effect describes a change in consumption patterns due to shifts in relative prices, where consumers prefer cheaper alternatives when the price of a good rises, keeping their utility level constant.

Inferior Good

A type of good for which demand decreases as the income of the consumer increases, in contrast to a normal good.

Indifference Curves

A graph showing different bundles of goods between which a consumer is indifferent.