Which of the following is a limitation of the payback period?

• A. Only considers long-term growth
• B. Hard to compute
• C. Requires market data
• D. Ignores post-payback profits

Answer: (D)

The payback period tells you how quickly a project recovers its initial cost, so it’s a simple measure of liquidity. The main limitation is that it stops counting once the initial outlay is recovered. It ignores all cash flows that occur after that point, so it doesn’t capture the project’s overall profitability or the value it creates beyond the break-even time. That’s why ignoring post-payback profits is the best description of its limitation.

Other options aren’t inherent drawbacks of the payback period: it isn’t primarily about long-term growth, it isn’t naturally hard to compute, and it doesn’t inherently require market data.