FIN.9:4.3 - Align service lives and preserve later choices

Different asset lives do not automatically make NPVs incomparable. Ask what is being chosen. Two complete opportunities can be compared at one date even if their cash ends at different times. A choice of equipment to deliver the same continuing service is different: the shorter-lived asset may require replacement, outsourcing or a period without that service. Include the actual continuation instead of comparing only the first purchase.

Construct the service horizon, operating effects, available replacements, residual values and timing through FIN.6. Repeating the shorter investment on unchanged terms is a substantive premise about future availability and cost. If technology, prices, capacity or the service requirement changes, use the changed continuation. Do not assume perpetual identical replacement solely to make a standard calculation convenient.

An equivalent annual amount can compact a comparison under an appropriate common service and repeatability basis. It is obtained by dividing a present value by the matching annuity factor for its life; the transformation does not establish those economic conditions. An explicit common-horizon cash comparison is often clearer when future replacements or residuals differ. The worked case below demonstrates the premise without requiring annualization.

Where a later action remains optional, include the contingent rule supplied by FIN.8. Several options can compete for the same later capacity or finance. Summing their separately optimal values can presume that each may be exercised in a state where the corporation can fund only one. Value the feasible joint policy with the same information dates and shared constraints. An action chosen before a future signal cannot be optimized separately in each final state.

Dependence between outcomes also matters. A sum of compatible expected cash values does not itself require statistically independent outcomes, but common shocks can cause simultaneous funding needs, operating failures or changes in financing cost. Stress the shared drivers across the combination, not a different favorable environment for each component. Return how the recommended combination behaves under those conditions and which feasible response remains.