tikfed

For those who suggest using EAA even if the projects do not repeat indefinitely consider the following two NOT repeating projects:
R=10%
Project Short:
-100 60 90
Project Long
-140 80 70 60
Since project Short is one year shorter, let’s add 1 cent to it in year 4, what diff 1 cent is going to make, you can neglect its effect.
So it becomes
-100 60 90 0.01
So now they have equal lives, we can simply use NPV, Long has a higher NPV of 35.66 vs. 28.93 for short so Long wins.
If you use EAA with original cash flows (not add the negligible 1 cent), you have an EAA of 16.66 for Short and 14.34 for long so Short wins.
I hope you can see that applying EAA for no repeating projects yields results that are inconsistent with the intuitive NPV rule. And thus EAA is only for repeating projects….
Also to support my concept, page 40 in corp book: “the analysis of a one-shot investment differs from that of an investment chain.”
So clearly they do not want us applying EAA for one shot investments.