Question

A consultant has presented the following statement to the board of directors of BigCo:When comparing two mutually exclusive projects, we only need to consider the NPV. When the two projects have different lives, we recommend comparing the NPV/life (i.e., NPV divided by the number of years) ratios of the projects and choosing the project with the highest ratio. The NPV/life ratio reflects the average annual increase in shareholder value expected from the project.
The Chair of the Board is not convinced and has asked FinCorp Inc. to review this statement. Explain to the Chair why the consultant’s approach to dealing with projects of different lives is incorrect. Provide a numerical demonstration to support your arguments.



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  • CreatedFebruary 25, 2015
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