Microtic Ltd, a manufacturer of watches, is considering the selection of one from two mutually exclusive investment projects, each with an estimated five-year life. Project A costs £1,616,000 and is forecast to generate annual cash flows of £500,000. Its estimated residual value after five years is £301,000. Project B, costing £556,000 and with a scrap value of £56,000, should generate annual cash flows of £200,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a.

Microtic Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to initial book value of investment).

Make the appropriate calculations and give reasons for your investment advice.