Another method to deal with the unequal life problem of projects is the equivalent annual annuity (EAA) method. In this method the annual cash flows under the alternative investments are converted into a constant cash flow stream whose NPV is equivalent to the NPV of the comparative project's initial stream.

Consider the case of Cute Camel Lumber Company:

Cute Camel Lumber Company is considering a three-year project that has a weighted average cost of capital of 11 % and a net present value (NPV) of $22,870. Cute Camel Lumber Company can replicate this project indefinitely.

The equivalent annual annuity (EAA) for this project is:

10,295

9.359

10,763

7,955

The EAA approach to evaluating projects with unequal lives does or does not (which answer) do a good job of taking inflation into account.