Comparing Net Present Values

The simplest way of choosing among mutually exclusive projects with equal lives is to compute the net present values of the projects and choose the one with the highest net present value. This decision rule is consistent with firm value maximization.

Illustration 6.1: Mutually Exclusive Cost Minimizing Projects with equal lives

Bookscape is choosing between alternative vendors who are offering phone systems. Both systems have 5-year lives, and the appropriate cost of capital is 10% for both projects. Figure 6.1 summarizes the expected cash outflows on the two investments:

Figure 6.1: Cash Flows on Phone Systems

Vendor 1: Less Expensive System -$ 8000 -$ 8000 -$ 8000 -$ 8000 12 3 4

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