ECONOMICS

Detailed explanation-1: -Annualized net present value approach is the most efficient technique for dealing with projects of unequal lives. In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the length of the projects lives is not critical.

Detailed explanation-2: -The annualized net present value (ANPV) approach is an approach to evaluating unequal-lived projects that converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount (in NPV terms).

Detailed explanation-3: -A method of comparing projects of unequal lives that assumes that each project can be repeated as many times as necessary to reach a common life span; the NPVs over this life span are then compared, and the project with the higher common life NPV is chosen.

Detailed explanation-4: -The equivalent annual annuity approach is one of two methods used in capital budgeting to compare mutually exclusive projects with unequal lives. The EAA approach calculates the constant annual cash flow generated by a project over its lifespan if it was an annuity.

Detailed explanation-5: -Using NPV. The advantage to using the NPV method over IRR using the example above is that NPV can handle multiple discount rates or varying cash flow directions. Each year’s cash flow can be discounted separately from the others, so the NPV method is more flexible when evaluating individual periods.