3.5 Equal Proposal Lives
To be strictly comparable, NPVs should be for proposals of equal lives or appraisal periods.[48] In many cases, project lives will be equal. If it does not make sense for the proposal lives to be equal, it is possible to make an adjustment to ensure NPVs are still comparable.
One approach is to calculate a terminal value for the longer-lived proposal at the time the short-lived proposal ends, and then do the analysis over the shorter period.
Another approach is to assume that one or both projects are repeated. For example, a two-year project could be repeated once to enable comparison to a four-year project.
An example where proposal lives may differ is in a lease versus buy decision. Suppose an organisation has a choice between leasing computers for one year or buying computers which will last for three years. To equalise project lives, use a three year appraisal period and assume that the computers will be leased in the second and third years as well.
Notes
- [48]Note that the requirement for proposal lives to be equal applies to NPV analysis only and not to the alterative decision methods outlined in section 3.6.
