Suppose a firm must choose between two machines having unequal lives. Both machines can do the same job, but they have different operating costs and will last for different time periods. The firm anticipates that both machines can and will need to be replaced indefinitely. Assume Project B has a lifetime of 16 years and Project A has a lifetime of 8 years. When evaluating the two mutually exclusive projects, which of the following is NOT correct?
If you use Equivalent Annual Cost, you will need to calculate the NPV for both projects
If the NPV of Project B is more positive / less negative than the NPV of two Project As (both situations ending after 16 years), accept Project B
If the NPV of Project A is more positive / less negative than the NPV of Project B, accept Project A
Compare the Equivalent Annual Cost (the value of the level payment annuity that has the same PV as our original set of cash flows). If the EAC of Project B is more negative than the EAC of Project A, accept Project A