Uniform Annual Equivalent (Uae) - a Capital Budgeting Method.

971 Words Jul 11th, 2010 4 Pages
Uniform Annual Equivalent (UAE) - A Capital Budgeting Method.

(The evaluation of two mutually exclusive projects with varying lives requires careful examination of the existence of the reinvestment opportunities at the end of the different economic lives of the projects. The current article deals with a method that may be adopted in situations wherein the level of investments, the life of the projects and cash inflows (or outflows) are unequal.)

Risk is inherent in almost every business decisions. Capital budgeting being an important financial excise, before committing funds physically, one need to look investment proposition from all possible angles. Many approaches & techniques are since developed that assists a financial managers
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85,417 & Rs. 36,178 respectively as under:

NPV
Machine B = Rs.50,000 + Rs. 15,000 + Rs. 15,000 + Rs. 15,000 2 3 (1.13) (1.13) (1.13)

= Rs.50,000 + Rs. 13,274 + Rs.11,747 + Rs. 10,396 = Rs.85,417.

Now UAE/ANB Machine B = Rs. 85,417 = Rs. 36,178 2.361

Where UAE is determined for a machine / project with cash outflows showing (expenses as in the instant case), the machine with lower UAE needs to be opted. Where the cash flows represent cash inflows or revenues or profits generated, the machine or project with higher UAE needs to be opted. Consider the following example:

Projects X Y
Capital Outlay (Rs.) 88,000 105,000
Estimated Cash inflows (Rs.) 15,500 10,000
Estimated life (in years) 4 6
Rate of interest (%) 13 13

In this case the calculation needs to be done on the same line as done for machine A B. But the only difference is: the project with

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