## Evaluating Projects with Unequal Lives

When comparing mutually exclusive projects of different durations, a straight NPV comparison is unfair — the longer project simply has more years to generate value. Two methods correct for this:

### i. Replacement Chain Method

Repeat (chain) the shorter project until both projects span a common time horizon (typically the lowest common multiple of their lives).
Then compare the NPVs of the equal-length chains.

### ii. Equivalent Annualized Criterion (EAC / Equivalent Annual NPV)

Convert each project's NPV into an equivalent annual cash flow by dividing the NPV by the relevant annuity (PVIFA) factor for its own life.
Compare the equivalent annual amounts directly — no need to build a common horizon.

> Key takeaway: Never compare raw NPVs of unequal-life projects head-to-head. Put them on a comparable basis first.

⚠️ Common exam mistakes

Comparing the raw NPVs of projects with different lives directly, which unfairly favours the longer-lived project.
Confusing the two remedies — replacement chain equalises the time horizon, whereas the equivalent annualized criterion converts NPV to a per-year figure.

Reference:

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