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Mutually Exclusive Capital Projects with Unequal Lives

  • It is possible for a firm to face a scenario where multiple capital projects show a positive net present value, but only enough resources are available to fund one of them. In this situation, the projects are considered to be mutually exclusive.
  • Analyzing mutually exclusive projects can be complicated when the projects have unequal lifetimes and simply choosing the project with the highest NPV can lead to an incorrect decision.
  • TNOCF and Mutually Exclusive Projects: Note that mutually exclusive projects exclude terminal year non-operating cash flows; the assumption is that the projects will be repeated in perpetuity.
  • There are two methods for choosing between mutually exclusive projects with unequal lives:
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01
CFA Level 2: Corporate Finance Part 1 – Introduction
02
Introduction to Capital Structure and Leverage
03
Introductory Capital Budgeting Remarks
04
Expansion Projects vs. Replacement Projects and Cash Flows
05
Impacts of Depreciation Method Choice on Capital Budget Analysis
06
Inflation and Capital Budgeting
07
Mutually Exclusive Capital Projects with Unequal Lives
08
Equivalent Annual Annuity (EAA) Approach
09
Least Common Multiple of Lives Approach
10
Stand Alone Risk and Capital Projects
11
CAPM and a Capital Project’s Discount Rate
12
Capital Projects and Real Options
13
Common Pitfalls in Capital Budgeting
14
Capital Budgeting Alternatives to NPV and IRR Analysis
15
Modigliani-Miller and Capital Structure Theory
16
Evaluating Capital Structure Policy
17
International Differences in Financial Leverage
18
Dividend and Share Repurchase Policies
19
Factors Affecting Corporate Dividend Policy Decisions
20
Signals from Dividend Policies

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Financial Analysis