Lesson 7 of 20

Mutually Exclusive Capital Projects with Unequal Lives

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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:
- Equivalent Annual Annuity Approach
- Least Common Multiple of Lives Approach