If a company uses payback rule as investment what is the risk it faces and why?

If a company uses the payback rule as an investment criertion, what is one of the risk it faces and why?

THE PAYBACK RULE
A. Defining the Rule
Payback period鈥攖he expected number of years required to recover the original investment.

Payback period = Years before full recovery + unrecovered cost at start of year/cash flow during year

Payback period rule鈥攊nvestment is acceptable if its calculated payback is less than some prespecified number of years.

B. Disadvantages
- No discounting involved
- Doesn't consider risk differences
- How to determine the cutoff point
- Bias for short-term investments

C. Advantages
- Simple to use (mostly by ignoring long-term)
- Bias for short-term promotes liquidity
- Can be adjusted for risk in some sense (altering the cutoff)

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