2.12 Sample Problem: NPV and AAA for Unequal Lives


  • WACC (weighted average cost of capital; discount rate) = 0.08
  • Cash flows projections as below – on the next page
  • The projects are mutually exclusive
  • Note: the projects have different expected lives


To Solve:

  • Calculate the NPV for both projects, using the given unequal lives.
  • Re-calculate the NPV for Project B, assuming that it is replicable as initially projected.
  • Calculate the AAA for both projects.
  • Based on the numbers calculated, which project would you choose?



This example is derived from: http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/comparing-projects-unequal-lives.asp. Thanks to Chaim Halberstam and Ariel Dorfman (The Lander College for Men class of 2019) for re-working the numbers to suit pedagogical requirements.



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Corporate Finance Copyright © 2023 by Kenneth S. Bigel is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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