Economics, Econometrics and Finance
8 years ago

New method simplifies project evaluation, revolutionizing investment decisions for firms.

International journal of management
An Empirical Comparison of the Capitalized Cost and Equivalent Annual Cost Methods for Evaluating Mutually Exclusive Projects
Jung‐Hua Hung, Yong‐Chin Liu

Paper Summary

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The article compares two methods for choosing investment projects with different lifespans and costs. The new method, called capitalized cost, is simpler than the traditional method and better for projects with unequal lives. The study shows that the total present value of equivalent annual costs equals the capitalized cost of a project that could be replaced indefinitely. This means the capitalized cost method is easier to use and more suitable for selecting projects with different economic lives.