When two mutually exclusive projects have different lives, how can an analyst determine which is better? What is the underlying assumption in this method?
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Answer:
When we have to select from two mutually exclusive projects with different lives, instead of choosing the project with greater NPV or lower NPV of costs, we should select the project with greater Equivalent Annual Revenue(EAR) or lesser Equivalent Annual Cost(EAC).
The basic underlying assumption made here is that we will continue to operate with the same equivalent annual revenue(EAR) or equivalent annual cost(EAC) in the future for the basis of selection criteria amonh the two projects
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