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-$1000 -$1000 (Replication)

Longer Life Project $350 $350 $350 $350 $350 $350 $350 $350 $350 $350

The net present value of investing in the 5-year project twice is $693, while the net present value of the 10-year project remains at $478. These net present values now can be compared since they correspond to two investment choices that have the same life.

This approach has its limitations. On a practical level, it can become tedious to use when the number of projects increases and the lives do not fit neatly into multiples of each other. For example, an analyst using this approach to compare a 7-year, a 9-year and a 13-year project would have to replicate these projects to 819 years to arrive at an equivalent life for all three. Theoretically, it is also difficult to argue that a firm's project choice will essentially remain unchanged over time, especially if the projects being compared are very attractive in terms of net present value.

Illustration 6.3: Project Replication to compare projects with different lives

Suppose you are deciding whether to buy a used car, which is inexpensive but does not give very good mileage, or a new car, which costs more but gets better mileage. The two options are listed in Table 6.1.

Table 6.1: Expected Cash Flows on New versus Used Car

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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