Question:
You are preparing a capital budget for your organization. One of the senior managers looks at your initial budget and says that it would be a lot easier to evaluate if you just use the accounting rate of return, rather than your current method of Net Present Value (NPV). Explain why you would prefer NPV to the accounting rate of return. Is there a simple ratio that you could show your manager that involves the numbers used in calculating NPV? What discount rate do we use in calculating NPV?