What is a major drawback of using the payback period to evaluate a project?

The payback period is a method used to determine how long it will take for an investment to recover its initial cost from the cash inflows it generates. One major drawback of this method is that it does not account for the time value of money. The time value of money concept asserts that a dollar today is worth more than a dollar in the future due to potential earning capacity. When using the payback period, future cash flows are treated as equal to present cash flows, disregarding their decreased value over time. This can lead to misleading conclusions about the profitability and financial viability of a project, as it does not consider how long money is tied up in the investment or the potential returns that could be earned if the money were invested elsewhere. Therefore, while the payback period provides a simple measure of cash flow recovery, its inability to account for the time value of money is a significant limitation in evaluating long-term projects.