Question

When mutually exclusive projects have different lives, a company should select the project with the

____

Highest IRR

Longest life

Lowest equivalent annual cost

Highest NPV discounted at the cost of capital

Answer 1

When mutually exclusive projects have different lives,

Selecting the project with highest IRR may not maximize the shareholders wealth.A project with shorter live may give the highest IRR , but the present Value of net returns from the project may be lower.

The project having the longest life may give return lower than the cost of capital. Hence this will reduce the shareholders wealth.

Project with lowest equivalent annual cost may have low revenue. Income , not cost should be the criterion for selection of projects.

Highest Net Present Value(NPV) discounted at the cost of capital will maximize the shareholders wealth .Hence NPV should be the criterion for selection of such projects.

Highest NPV discounted at the cost of capital