Ch13 Unequal Lives - Financial Management Chapter 13...

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1 Financial Management Chapter 13 Projects with Unequal Lives ADM 2350 Prepared by Dr. William F. Rentz, Ph.D., LIFA
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2 Introduction This demonstration looks at the capital budgeting decision when comparing two projects with unequal lives. It examines 3 cases. Case 1: Independent projects Case 2: Mutually exclusive, non-repeating Case 3: Mutually exclusive, repeating
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3 Projects with Unequal Lives Project A, 3-year life Initial Outlay = $20,000, NCFs = $12,590 Project B, 9-year life Initial Outlay = $20,000, NCFs = $6,625
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4 Accumulated NCFs for Project A Time NCF Accumulated NCF 0 -$20,000 -$20,000 1 $12,590 -$ 7,410 2 $12,590 $ 5,180 3 $12,590 $17,770
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5 Accumulated Discounted NCFs for Project A at k = 15% Discounted Accumulated Time NCF Discounted NCF 0 -$20,000 -$20,000 1 $10,948 -$ 9,052 2 $ 9,520 $ 468 3 $ 8,278 $ 8,746
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6 Payback Period 1 yr. + (7,410/12,590) = 1.589 yr. Discounted Payback Period 1 yr. + (9,052/9,520) = 1.951 yr.
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7 NPV for Project A What does the accumulated discounted NCF @ t = 3 represent? NPV = $8,746
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Ch13 Unequal Lives - Financial Management Chapter 13...

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