To evaluate two projects with uneven lives, using NPV method, (1) if the two projects are...

To evaluate two projects with uneven lives, using NPV method, (1) if the two projects are independent from each other, what should we do? (2) If the two projects are mutually exclusive but can not be repeated, what should we do? (3) If the two projects are mutually exclusive and repeatable, what should we do?

Expert Solution

1) When projects are independent, one can simply compare the NPV of both the projects and accept the ones with positive NPV's. In case of budget constraints, the objective is to maximise the NPV which is additive in nature for projects.

2) When two projects are mutually exclusive but cannot be repeated , again one can find NPV of individual project and choose the one with higher NPV, or one can use Incremental cashflows and find the NPV to decide on a project

3) If the two projects are mutually exclusive and repeatable , then simple NPV sometimes do not provide the right decision as the projects can be repeated. So, in this case , one should use the Equivalent Annual Annuity (EAA) or Equivalent Annual Cost (EAC) approach which gives us the annual cost or benefit of choosing a project. The yearly equivalent cashflows of both projects can be easily compared and the one with less annual cost/more annual benefit may be selected

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