Payback period method:The payback period refers to the amount of time it takes to recover the cost of an investment or how long it takes for an investor to reach breakeven. Account and fund managers use the payback period to determine whether to go through with an investment. Shorter paybacks mean more attractive investments, while longer payback periods are less desirable. The payback period is calculated by dividing the amount of the investment by the annual cash flow. The payback period, as a tool of analysis, is often used because it is easy to apply and easy to understand for most individuals, regardless of academic training or field of endeavor. The payback period is an effective measure of investment risk. It is widely used when liquidity is an important criterion to choose a project. A business is said to be overleveraged when it is carrying too much debt when compared to its operating cash flows and equity. An overleveraged company has difficulty in paying its interest and principal payments and is often unable to pay its operating expenses because of excessive costs due to its debt burden, which often leads to a downward financial spiral. In short, the company faces a liquidity crisis. Thus, the payback period method is advised for the evaluation of investment opportunities in the situation of an overleveraged business. In an uncertain market, one thing is certain: market declines are an inevitable part of investing. Thus, a company should use payback analysis to get an overview of the life of their investment and its returns. Projects with a longer payback period should be avoided during uncertain market conditions as they can pose a severe impact on the liquidity of the firm. Thus, option 2 is the correct answer.