To choose the best alternative among the given alternatives in the present worth

Question

To choose the best alternative among the given alternatives in the present worth analysis method when alternatives can be repeated at the end of their useful lives, it is necessary to: 5. Calculate the present worth of each alternative based on the useful lives if the useful lives are equal or using the LCM of the lives if the useful lives are different a. b. Calculate the present worth of each alternative using LCM of the lives if the useful lives are equal or using the longest live if the useful lives are different c. Calculate the present worth of each alternative based on its corresponding useful live if useful lives are different

Explanation / Answer

ANswer

(a) Calculate the present worth of each alternative based on the useful lives if useful lifes are equal or using LCM of the lives if useful lives are different.

If we calculate the present worth of each alternative based on the useful lives, if useful lives are different, then in that case we wont be able to compare the two projects as shorter life projects will be favoured based on lower PW to total costs, even though they may not be economically viable. So, to remove these comparatibility issue in case of different useful life project, we use least common multiple method wherein we assume that a project can be repeated in its useful life.

Example, Project A having useful life of 3 years and Project B having useful life of 6 years. So Project A will be repeated after 3rd year to have a total life of 6 year so that it can be compared with project B.

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