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I have another confusion. If, two projects are into consideration.
Project A has an NPV of 40,000 and is expected to last 4 years
Project B has an NPV of 15000 is expected to last 1 yearcoc is 10%
40,000 / 4 year discount factor at 10%
15,000 / 1 year discount factor at 10%Equivalent annual benefit A = 12620$
Equivalent annual benefit B = 16500$What will be our decision for considering the project?
> If both projects are mutually exclusive
> and if there is no such mutually exclusive information given.I was going through this article and then the question in my mind occurred.
Like, when to use “eac approach” and when to Use “selecting the highest npv approach”?
With regard to inflation, it is extremely unlikely it could be relevant.
When asset is being replaced, then always use the EAC approach (which would always give the same result as using the overall NPV).
In your example, the EAC of A is 12,620. This means that replacing is equivalent to a benefit 12,620 per year in perpetuity and therefore the overall NPV will be 12,620/0.10 = 126,200.
Have you watched my free lectures on this?
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