u Reasons for mutually exclusive investments: u Differences in the lives of projects u Differences in the use of other scarce resources u Floor space, Skilled personnel u Management talent, Franchise Chapter 7 -- Ranking Mutually Exclusive Investments

NPV Is Better Than IRR u Net present value measures the wealth created today from an investment today. This is the goal of management. u IRR does not account for the size of the project. u If money cost 10%, it is better to earn 12% on a million dollar project than 12% on a $1,000 project. u IRR ignores the length of time the money is invested. u Using the example above, it may be better to earn 12% for 5 years than 14% for one year.

When to Use NPV Versus Equivalent Annuity for Projects With Unequal Lives u If you cannot reuse the constrained resource, then maximize NPV u very rare situation u industrial park location or a lease u If you can reuse the constrained resource, then maximize the equivalent annuity u most situations in reality

Repair or Replace Decisions u In most situations a new asset will have a longer life than an existing asset, in these cases you must use the equivalent annuity method (if the asset can be replaced) u You should not net the salvage value of the old into the cost of the new, it alters the equivalent annuity -- they must be kept separate

Optimal Abandonment Decisions u Do not ignore the salvage value in predicting cash flows u Salvage value typically decreases with age u When using the computer it is easier to start with the longest life first

Optimal Abandonment Decisions u If abandonment frees up a constrained resource and replacement with a like resource is possible, then use the equivalent annuity method u If you cannot replace the constrained resource with a like resource, then maximize the net present value considering future salvage values