How do you handle multiple projects with different lifespans and NPV profiles?

2 Consider risk-adjusted NPV

Another challenge of using NPV to compare projects is that it does not account for the riskiness of the cash flows. For example, a project that has a higher NPV but a higher uncertainty may not be preferable to a project that has a lower NPV but a lower uncertainty, depending on your risk appetite and the cost of capital. To adjust for this, you can use the risk-adjusted NPV method, which applies a higher discount rate to riskier projects and a lower discount rate to less risky projects. This reflects the higher required return and the lower present value of riskier cash flows.

4 Apply ranking methods and decision rules

A fourth challenge of using NPV to compare projects is that it does not provide a clear ranking or a definitive decision for choosing among multiple projects. For example, a project that has a higher NPV but a lower profitability index may not be preferable to a project that has a lower NPV but a higher profitability index, depending on the availability and allocation of capital. To solve this, you can apply ranking methods and decision rules, such as the internal rate of return, the payback period, the modified internal rate of return, and the profitability index, which complement the NPV and provide additional criteria and insights for selecting the best projects.

5 Monitor and evaluate project performance

A fifth challenge of using NPV to compare projects is that it does not reflect the actual performance or value of the projects after they are implemented. For example, a project that has a higher NPV but a lower actual return may not be preferable to a project that has a lower NPV but a higher actual return, depending on the variance and causes of the differences. To overcome this, you can monitor and evaluate the project performance using variance analysis, post-audits, and value-added analysis, which compare the actual results with the planned results and the opportunity costs and identify the reasons and implications of the deviations.

6 Improve your cost accounting skills

As you can see, handling multiple projects with different lifespans and NPV profiles is not a simple task. It requires a solid understanding of cost accounting concepts and techniques, as well as a critical and analytical approach to project evaluation and selection. If you want to improve your cost accounting skills and learn more about how to handle multiple projects with different lifespans and NPV profiles, you can check out our online courses, webinars, and resources that cover these topics and more.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?