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Which of the following best describes the appropriate way to evaluate mutually exclusive projects with unequal lives? a) NPV is the appropriate method because NPV has been always the method of choice
Which of the following best describes the appropriate way to evaluate mutually exclusive projects with unequal lives?
a) NPV is the appropriate method because NPV has been always the method of choice.
b) IRR is the appropriate method because IRR adjusts for the fact that the projects are not of the same length.
c) Replacement chain is the appropriate method because it equalizes the length of the unequal projects.
d) Equivalent annual annuity is the appropriate method because it adjusts for the fact that the projects are not of the same length.
e) Both c. and d. are correct.
Expert Solution
If the projects are mutually exclusive with unequal lives the replacement chain is the appropriate method because it equalizes the length of the unequal projects and equivalent annual annuity is the appropriate method because it adjusts for the fact that the projects are not of the same length. The project that have highest equivalent annual annuity should be accepted.
Hence, the option e) Both c. and d. are correct
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