Mutually exclusive projects

Definition

Mutually exclusive projects are investment opportunities where the acceptance of one project necessitates the rejection of another. This is due to constraints such as budget, resources, or strategic alignment.

5 Must Know Facts For Your Next Test

1. Mutually exclusive projects require a decision-making process that involves comparing the net present value (NPV) of each project.
2. Only one project can be chosen from a set of mutually exclusive projects; they cannot coexist.
3. The primary criterion for choosing between mutually exclusive projects is often the one with the highest NPV.
4. Other evaluation metrics like Internal Rate of Return (IRR) and Payback Period may also be considered but should align with NPV results.
5. Decision rules for mutually exclusive projects differ from those for independent projects, where multiple investments may be pursued simultaneously.

Review Questions

• Why can't two mutually exclusive projects be undertaken at the same time?
• What is often considered the most important metric when evaluating mutually exclusive projects?
• How do decision rules for mutually exclusive projects differ from those for independent projects?

Related terms

Net Present Value (NPV): The difference between the present value of cash inflows and outflows over a period of time.

Internal Rate of Return (IRR): The discount rate that makes the net present value (NPV) of a project zero.

Payback Period: The amount of time required to recover the initial investment in a project.