Question

Why we cannot use different compounding periods when comparing alternatives in the present or future worth methods? Give an example of how different compounding periods will affect the selection of an alternative

Answer 1

We cannot use different compounding periods when comparing alternatives in the present or future worth methods because comparing alternatives with different compounding periods is unbiased. That is while in calculation the shorter life span alternative having low cost than longer one. The longer alternative will gives higher equovalequ present worth , that is it will show differences in revenue , cost matters as compared to lower span alternatives, in future worth case also same , the different time span gives different values in each and aspect so avoid to use different compounding periods when comparing alternatives in the present or future worth.

Example :

if there are two alternatives with useful lives of 4 years and 5 years. Then the alternatives will compared over a period of 20 years at the given rate of interest per year. Thus the cash flow of the alternative having the life span of 4 years is looking low present worth equivalent and give more benefit and vice versa in case of longer project , this is a conflict situation . So you cannot use different compounding periods when comparing alternatives in present or future worth methods.