When comparing two projects with different lives, why do you compute an annuity

Question

When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV)? Explain.

A. to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe

B. so that the projects can be compared on their cost or value created per year

C. so that you can see which project has the greatest net present value (NPV)

D. to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered

Explanation / Answer

When comparing two projects with different lives, annuity with an equivalent present value to the net present value is computed, so that you can see which project has the greatest net present value (NPV). This helps make a sound decision regarding the project to be chosen by the organisation for development.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.