When Comparing Two Projects with Different Lives, Why Do You

question 78

Multiple Choice

When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV) ?

• A)So that you can see which project has the greatest net present value (NPV).
• B)So that the projects can be compared on their cost or value created per year.
• C)To ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered.
• D)To reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe.

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Definitions:

Invoice Cost

The price of goods or services listed on an invoice, typically inclusive of fees and charges before any discounts.

Incidental Costs

Incidental costs refer to minor or secondary expenses that are not planned for but occur in the course of conducting business.

LIFO

Last In, First Out, an inventory valuation method where the most recently produced items are recorded as sold first.

Current Costs

The cost associated with purchasing goods or services in the present time, often used in accounting to refer to the cost of inventory or services consumed.