Replacement chain approach
Replacement chain approach (alternatively known as common life approach) is a method of comparing mutually exclusive projects that have unequal lives. Each project is replicated so that they will both terminate in a common year. If projects with lives of 3 years and 5 years are being evaluated, then the 3-year project would be replicated 5 times and the 5-year project replicated 3 times; thus, both projects would terminate in 15 years.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Replacement chain approach (common life approach). A method of comparing mutually exclusive projects that have unequal lives. Each project is replicated so that they will both terminate in a common year. If projects with lives of 3 years and 5 years are being evaluated, then the 3-year project would be replicated 5 times and the 5-year project replicated 3 times; thus, both projects would terminate in 15 years.
According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),
- Replacement chain approach (common life approach). A method of comparing projects with unequal lives that assumes that each project can be repeated as many times as necessary to reach a common life. The NPVs over this life are then compared, and the project with the higher common-life NPV is chosen.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
