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
Money Mogul
Get All The Support And Guidance You Need To Be A Success At Being A Money Mogul. This Book Is One Of The Most Valuable Resources In The World When It Comes To How to Maintain the Pledge to Fix Your Finances from Your New Year’s Resolution.
Post a comment