A4.7 NPVs should generally be calculated over the same time period for all options. The selected time horizon should reflect the economic life of the services in view, or the useful life of relevant key assets. It should be sufficiently distant to cover all the important cost and benefit differences between the options. For example, the appropriate period may be 5 years for an information technology project, 10 years for an industrial development project, or 25 years or more for a longer term project.
A4.8 Assets with different lives can be accommodated within this approach by assuming replacement at appropriate times and making suitable use of residual values (RVs). For instance,
• Suppose Option 1 involves replacement of a piece of equipment with a 15-year life in Year 10 of an appraisal, while Option 2 requires replacement of similar equipment in Year 5;
• Using a common time horizon of 20 years, the difference in useful life remaining at the end of 20 years will be accounted for by assigning different RVs to each option in Year 20;
• In Option 1 the equipment will be assigned an RV of approximately one third of its value, since at Year 20 it will still have 5 years i.e. one third of its useful life remaining;
• In Option 2 the equipment will have a zero RV, because it will be at the end of its useful life.