SGMAK Associates provides free video tutorials, courses-Comparing alternatives Unequal service lives

The following example shows how to compare alternatives when

useful lives (service lives) are not equal. Two different approaches
are presented. In the first method, a common plan period is


considered. Each alternative is replaced with an identical alternative


multiple times (as required) during the plan period. For example, in


comparing alternatives with 4 years and 8 years of service lives


respectively, a common plan period of 8 years is considered. During


the plan first alternative is replaced with an identical alternative at the


end of 4 years. This approach equalizes the impact of unequal


service lives. With this modification, net present value criterion can


be used to compare the alternatives. The following example


illustrates this approach.
Problem Statement
The alternative C has an initial cost of $5000, useful life of 4 years,


and generates a uniform annual benefit of $2000 and no salvage


value at the end of its useful life. The alternative D has an initial cost


of $12000, useful life of 8 years and generates uniform annual benefit


of $2500 and no salvage value.

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