Which technique is most suitable for comparing mutually exclusive projects with unequal useful lives when replacement is assumed?
Correct answer: B. Equivalent annual cost method
- A. Accounting rate of return
- B. Equivalent annual cost method
- C. Simple payback method
- D. Current ratio method
Explanation
The equivalent annual cost method converts the costs of projects with different lives into comparable annual amounts. This helps decision makers compare replacement alternatives on a consistent time basis.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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