2.14 NPV and AAA for Unequal Lives (Solutions)
Solution:
($ Millions)
| Machine A |
Machine B | |||
| Year | Cash Flows | Discounted Cash Flow | Cash Flows | Discounted Cash Flow |
| 0 | ($10,000) | ($10,000) | ($5,000) | ($5,000) |
| 1 | 2,000 | 1,852 | 1,750 | 1,620 |
| 2 | 3,500 | 3,001 | 3,250 | 2,786 |
| 3 | 3,250 | 2,580 | 3,000 | 2,381 |
| NPV | 1,787 |
| 3 | ($5,000) | (3,969) | ||
| 4 | 3,000 | 2,205 | 1,750 | 1,286 |
| 5 | 2,750 | 1,872 | 3,250 | 2,212 |
| 6 | 2,500 | 1,575 | 3,000 | 1,891 |
| NPV | 3,085 | 3,207 | ||
| AAA | 667.33 | 693.72 |
The table below summarizes the data.
| Project A | Project B – 3 Years | Project B – 6 Years | Decision Choice | |
| NPV | 3,085 | 1,787 | A | |
| 3,207 | B | |||
| AAA | 667.33 | 693.72 | B |
On an NPV basis, project A is favored when compared to project B, if assumed that B is non-replicable. When assuming equal lives, by replicating Project B, both NPV and AAA favor B.