Capital Budgeting - Unequal Lives (ppt)

Capital Budgeting - Unequal Lives (ppt) - Click to edit...

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Unformatted text preview: Click to edit Master subtitle style 12/8/09 Dan Salandro Capital Budgeting Valuing Unequal Lived Projects 1 Dan Salandro 12/8/09 Dan Salandro The decision the firm must make is between two mutually exclusive projects, A and B. ◦ A- has an economic life of ten years, cost $20,000 and is expecting incremental cash flows of $3752.21 every year. ◦ B – has an economic life of five years, cost $20,000 and is expecting incremental cash flows of $5880.72 every year. Two Projects Dan Salandro 2 12/8/09 Dan Salandro Dan Salandro 3 Two Projects 1 2 3 4 5 6 7 8 9 10-20,000 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 A 1 2 3 4 5-20,000 5880.72 5880.72 5880.72 5880.72 5880.72 B 12/8/09 Dan Salandro These projects are mutually exclusive Notice they span time periods of different length A simple comparison of their respective NPVs would not be prudent Dan Salandro 4 Two Projects 12/8/09 Dan Salandro Dan Salandro 5 1 2 3 4 5 6 7 8 9 10-20,000 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 3752.21 1 2 3 4 5-20,000 5880.72 5880.72 5880.72 5880.72 5880.72 10% NPV A $3,055.71 NPV B $2,292.56 A B Cost of Capital 12/8/09 Dan Salandro Notice the NPV of A is larger than the NPV of B This is not a reasonable comparison because A has a much longer time period and as such we would expect a larger NPV Dan Salandro 6 Two Projects 12/8/09...
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This note was uploaded on 12/07/2009 for the course FIRE 312 taught by Professor Salandro during the Spring '09 term at VCU.

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Capital Budgeting - Unequal Lives (ppt) - Click to edit...

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