(The evaluation of two mutually exclusive projects with varying lives requires careful examination of the existence of the reinvestment opportunities at the end of the different economic lives of the projects. The current article deals with a method that may be adopted in situations wherein the level of investments, the life of the projects and cash inflows (or outflows) are unequal.)
Risk is inherent in almost every business decisions. Capital budgeting being an important financial excise, before committing funds physically, one need to look investment proposition from all possible angles. Many approaches & techniques are since developed that assists a financial managers in their decision making process & evaluation of alternatives before them. Among the various techniques & approaches available there has been confusion in understanding one available to address a situation of a capital intensive investment project with unequal life. Consider the following project before a financial manager.
Project A Project B a. Investment Outlay (Rs.) 75,000 50,000 b. Annual expenses (Rs.) 13,000 15,000 c. Life of the Project (years) 5 4 d. Rate of interest (%) 13 13
At the outset, it is likely that Project B may get selected by a calculation as follows: Project A Project B e. Initial out lay 75,000 50,000 f. Total expenses-( b X c)...