Question

projects with unequal lives cause problems when making decisions decision making? how can we overcome this problem?

1. “A project’s engineering life does not always equal its economic life.” Explain this statement with an example

Answer 1

Projects with unequal lives are common in capital budgeting decisions and play an important role in mutually exclusive projects. To deal with projects that have unequal lives, we find a common multiple of the years of life of each alternative and assume that projects can repeat for the common multiple of the years of life. Another approach to deal with unequal lives project is to use equivalent annual cash flows.

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A projects engineering life refers to the physical life of the project and physical life ends when the projects no longer serves its intended purpose. For example a bridge can have a physical life of 100 years after performing periodic maintenance and after 100 years, the bridge can become weak and collapse anytime.

However economic life is different from engineering life and economic life is the time from the instant a project is placed into service until the time the benefit from the project is greater than the cost of replacing it.

For example a bridge put into service now may require periodic maintenance every 10 years and if the cost of maintenance in year 10 is greater than the cost of replacing the bridge by a new one, we can say the bridge has reached its economic life.

Thus economic life is always lesser than engineering life because over a period of time a bridge can be made operational by performing maintenance but the costs will be very high. This is the time the bridge must be replaced by a new one because it has reached its economic life.