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How do NPV and IRR differ when ranking mutually exclusive projects? What is the cost of capital and how is it used as the discount rate? How is risk incorporated into capital budgeting decisions? How do taxes and depreciation (capital allowances) affect project cash flows? What is a perpetuity and how is it valued? How do you estimate the incremental cash flows for a replacement decision? What is the modified internal rate of return (MIRR) and why use it? How do real options add value in capital budgeting? How does post-audit (post-completion review) improve capital budgeting? How do you appraise a project under capital rationing with divisible projects?
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How do you appraise projects with unequal lives?

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When comparing mutually exclusive projects with different lifespans, a straight NPV comparison is unfair. Use the equivalent annual cost/annuity (EAC) method—converting each project's NPV into an equivalent annual amount—or the replacement-chain (common multiple of lives) approach, so the projects are compared on a like-for-like time basis.
EAC = NPV / annuity factor for the project's life.
Real-world example Two machines with 3- and 5-year lives are compared using equivalent annual cost, not raw NPV.

Common follow-ups: Why is raw NPV unfair here? | What is the equivalent annual cost method?

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All 34 Capital Budgeting questions