6.3 DECISION CONCERNING MUTUALLY EXCLUSIVE PROPOSALS WITH UNEQUAL LIVES
If a finance manager has to select only one of two proposals with varying economic lives, the traditional NPV rule may not yield an incorrect decision if the two proposals are independent. But in case of mutually exclusive proposals, the decision may be incorrect if the economic lives of the two proposals are different. Thus in such cases, the varying economic lives of the two proposals have to be made identical or comparable and then only the NPV rule needs to be applied. For this purpose, two types of methods are usually applied. They are:
- Annualised NPV method
- Replacement Chain method
6.3.1 Annualised NPV Method
In order to make the economic life comparable, the annualised ...
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