Describe the process of handling Unequal Service Lives?

Answer:

When the project’s life is equal, it is easy to determine the different capital budgeting techniques, such as internal rate of return (IRR), net present value (NPV) and many more, and compare them and make the best decision, but two or more projects are not considered reliable when they have different lives to compare.

If the given proposals are mutually exclusive (where the investors have to select one of them) and have different lives, in this case the capital budgeting decision is taken based on annual net present value other worse called as annual equivalent annuity. Under this method, investor should select the project having higher EAA. Main drawback in this method is it doesn’t consider the inflation costs.