Equivalent Annuity Method

Equivalent annuity method is the method of capital budgeting which is used when we have to evaluate two projects whose life time is not same. Life time means working time of asset. Suppose, if any asset's life time is 10 years and other asset’s life time is 6 years, then we can not compare these two projects with the help of NPV. To solve this problem, some of wise finance managers have made equivalent annuity method. This method tells us that we can convert total NPV of each project into annual NPV just by dividing total NPV by the present value of annuity factor. After this adding only NPV that it will equal to other’s cash inflows