Investment Appraisal Many companies have a set of appraisal methods that they recommend their managers use when considering new project investments. Assume that your company uses three methods:

NPV (discount rate of 20 per cent on all new projects); payback period (two to three years maximum);

and accounting rate of return (20 per cent on all new projects). Explain to your manager why the firm’s investment policy may lead to conflicting recommendations. Why do you think your firm has this policy?

Is your manager correct to argue that you should focus mainly on the NPV method, using the other criteria as supplementary methodologies? What should the firm do if the project has an NPV of zero? The manager says that he is thinking of introducing a margin of safety on all new projects. What is your advice?