Appendix A 243is greater than or less than the life of at least one other project. This
situation did not occur in Example 17 of the previous section, since all
projects had 4 year lives.
There are four common approaches to establishing a planning hori-
zon for evaluating decision alternatives. These are (1) shortest life, (2) lon-
gest life, (3) least common multiple of lives, and (4) standard. The shortest
life planning horizon is established by selecting the project with the short-
est life and setting this life as the planning horizon. A significant issue in
this approach is how to value the remaining cash flows for projects whose
lives are truncated. The typical approach to this valuation is to estimate
the value of the remaining cash flows as the salvage value (market value)
of the investment at that point in its life.
Example 18
Determine the shortest life planning horizon for projects A, B, C with
lives 3, 5, and 6 years, respectively.
The shortest life planning horizon is 3 years based on Project A. A
salvage value must be established at t = 3 for B’s cash flows in years 4
and 5. A salvage value must be established at t = 3 for C’s cash flows
in years 4, 5, and 6.
The longest life planning horizon is established by selecting the proj-
ect with the longest life and setting this life as the planning horizon. The
significant issue in this approach is how to handle projects whose cash
flows don’t extend this long. The typical resolution for this problem is to
assume that shorter projects are repeated consecutively (end-to-end) un-
til one of the repetitions extends at least as far as the planning horizon.
The assumption of project repeatability deserves careful consideration,
since in some cases it is reasonable and in others it may be quite un-
reasonable. The reasonableness of the assumption is largely a function
of the type of investment and the rate of innovation occurring within
the investment’s field. (For example, assuming repeatability of invest-
ments in high technology equipment is frequently ill advised, since the
field is advancing rapidly.) If in repeating a project’s cash flows, the last
repetition’s cash flows extend beyond the planning horizon, then the
truncated cash flows (those that extend beyond the planning horizon)
must be assigned a salvage value as above.