When two or more mutually exclusive alternative investments have , neither the net present value nor the internal rate of return method yields reliable accept-reject information unless the projects are evaluated for an equal period of time.
A)unequal lives
B)unequal net cash flows
C)unequal net investments
D)a and b

Question

Quizplus · Accepted Answer

When alternative investments have unequal lives, the net present value and internal rate of return methods cannot provide reliable accept-reject information unless the projects are evaluated for an equal period of time. This is because the projects' cash flows cannot be simply compared if they have different time horizons. Therefore, it is important to either adjust the cash flows using equivalent annual annuity or evaluate the projects over a common time frame. In the case of mutually exclusive projects with unequal lives, the project with a higher equivalent annual annuity or NPV per year should be selected.

When Two or More Mutually Exclusive Alternative Investments Have