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why can't we compare between projects that has different period ( years ) , using the...

why can't we compare between projects that has different period ( years ) , using the present worth (PW) method or using future worth (FW) method ? while its possible to use annual worth comparison method ? what is it that makes annual worth method able to do such comparisons?

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Answer #1

Present worth is calculated using discount factors that is calculated for each year

Now if two projects with different time periods hence both the firms will have different number of cash flows.

Hence to compare for these two projects we need to make these time periods equal by finding LCM of these two time periods.

Same logic goes with future worth.

Annual worth is to find equivalent annual net worth irrespective of life of investment.

Annual worth gives an idea that each project has equivalent annual worth that are comparable therefore it is not concerned with life of investment .

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