Projects with Different Lives

In many cases, firms have to choose among projects with different lives1. In doing so, they can no longer rely solely on the net present value. This is so because, as a dollar figure, the NPV is likely to be higher for longer term projects; the net present value of a project with only 2 years of cash flows is likely to be lower than one with 30 years of cash flows.

Assume that you are choosing between a 5-year and a 10-year project, with the cash flows shown in Figure 6.4. A discount rate of 12% applies for each.

Figure 6.4: Cash Flows on Projects with Unequal Lives

Shorter Life Project $400 $400 $400 $400 $400 0 1 2 3 4 5

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