| Abstract: | The central issue in equipment investment analysis is the selection of the best of two or more alternatives. A common procedure is to first assume that for each alternative there is an infinite stream of identical pieces of equipment. The present value of the associated infinite stream of revenues and costs is calculated. Then the alternative having the highest present value (where revenues are positive and costs are negative) is selected. The assumption of the infinite stream, though computationally desirable, is not very palatable to the decision maker. In this paper we show that the above procedure is equivalent to using a criterion which is definitely more appealing. The author has found this “equivalence” result to be helpful in teaching the basic concepts of the present value procedure. Also the result should be of interest to practitioners involved in equipment investment decision making. |
