ACCT-311 Lecture Notes - Lecture 6: Net Present Value
25 Mar 2016
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Document Summary
Project s with a short life may be replicated at least one ime during the long life of project l. L"s npv should be compared with the sum of two ss" npvs. A simpler alternaive is to calculate eaa, or average annual. Convert the pv into a stream of annuity payments with the same pv. S: n = 2, i/yr = 10, pv = -4. 132, fv = 0. L: n = 4, i/yr = 10, pv = -6. 190, fv = 0. S has higher eaa, so it is a beter project. Can arise of mutually exclusive projects with signiicantly diferent lives. Several potenially serious weaknesses inherent in this type of analysis: More diicult to esimate the lives of a series of projects. Projects are normally analyzed under the assumpion that the irm will operate the asset ill its end. If terminated prior to year 3, the machinery will have posiive salvage value.
