Which investment appraisal method would be more useful to ABC when deciding whether to build another e-waste factory?

• A. Net present value is the best single method
• B. Payback is useful for risk and speed, while ARR gives a broader view of profitability; using both together would be more effective
• C. Internal rate of return is always superior
• D. Payback is the only important measure

Answer: (B)

When deciding on expanding with another factory, you want to understand both how quickly you can recover the initial outlay and what the overall profitability looks like over the project's life. Payback focuses on speed and risk by showing how fast cash returns cover the initial investment, which is helpful when capital is tight or market conditions are uncertain. But it ignores any profits earned after the payback period and doesn’t account for the time value of money, so it can miss long-term value.

ARR adds another perspective by measuring profitability relative to the investment using accounting profits. It gives a broader view of potential returns than payback, helping you compare projects with different lifespans or accounting patterns. However, ARR doesn’t reflect cash flows and doesn’t discount money over time, so it can be misleading if cash timing is important.

Using both measures together gives a more complete picture: you gain insight into how quickly you might recover the investment and a broader sense of overall profitability. This balanced view is especially useful for a big capacity decision like building another e-waste factory, where both liquidity risk and long-term returns matter.

Relying on a single measure can be risky. Measures like IRR can be misleading with non-standard cash flows, and payback alone ignores profitability, while relying solely on one theoretically superior method isn’t always practical for strategic decisions. The combination of quick recovery insight and profitability perspective offers a pragmatic approach for ABC.