What do you do if a project is mutually exclusive?
If the project are mutually exclusive, it means the company can select any one of the projects. It can’t invest simultaneously in all the three projects. In such situation, the company should opt for projects generating the maximum net present value i.e. Project B.
What does it mean when two projects are mutually exclusive?
Mutually Exclusive Projects is the term which is used generally in the capital budgeting process where the companies choose a single project on the basis of certain parameters out of the set of the projects where acceptance of one project will lead to rejection of the other projects.
When mutually exclusive projects are considered then the?
When mutually exclusive projects are considered, then the NPV method should be used to evaluate projects. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis.
What are some examples of mutually exclusive projects?
Example of Mutually Exclusive For example, assume a company has a budget of $50,000 for expansion projects. If available Projects A and B each cost $40,000 and Project C costs only $10,000, then Projects A and B are mutually exclusive. If the company pursues A, it cannot also afford to pursue B and vice versa.
Which project will have a steeper NPV profile ie which NPV is more sensitive to changes in the discount rate )?
The NPV profiles of Project A and B join at the crossover rate, at which the projects’ NPVs are equal. The slope of Project A’s NPV profile is steeper. This indicates that Project A’s NPV is more sensitive to changes in the discount rates.
When two projects are mutually exclusive which project should be selected?
Mutually exclusive projects: If the NPV of one project is greater than the NPV of the other project, accept the project with the higher NPV. If both projects have a negative NPV, reject both projects.
When dealing with mutually exclusive projects the most reliable decision rule is?
If projects are mutually exclusive, the decision rule is to accept the project with the shortest payback period only when the payback period is less than or equal to the maximum payback period. 4.
How can mutually exclusive projects with different lives be best evaluated?
IRR is the most accurate method to make a comparison between two mutually exclusive methods. Moreover, IRRis always expressed in percentage. Higher IRR rate project will be selected for the process because higher IRR represents higher return percentage.
When selecting the best project from a group of mutually exclusive projects you should choose the project with the highest?
2) For mutually exclusive projects, the project with the higher IRR is the correct selection.
When making the decision between acceptable mutually exclusive projects the firm should?
When considering two mutually exclusive projects, the financial manager should always select the project with the higher internal rate of return, provided the projects have the same initial cost.
When evaluating mutually exclusive projects the firm should?
When choosing between mutually exclusive projects What is the best method to use?
The highest NPV is always the best option. When choosing between mutually exclusive projects, the highest NPV is always the best option. Based upon the following data, which of the following mutually exclusive projects should you choose if your required return is 10%? E.
How do you evaluate projects with unequal lives?
Projects with Unequal Lives
- There are two approaches to analyzing such a situation: the annual net present value method and the replacement chain method.
- In the replacement chain method, the cash flows projections for the projects under consideration are repeated up to the least common useful life.
When choosing between mutually exclusive projects What is the best method to use quizlet?
The highest NPV is always the best option. When choosing between mutually exclusive projects, the highest NPV is always the best option. Based upon the following data, which of the following mutually exclusive projects should you choose if your required return is 10%?
How do you evaluate mutually exclusive projects?
Which project would you choose if the projects are mutually exclusive?
Since the projects are mutually exclusive, we can’t choose all the projects simultaneously. However, since both the NPV and IRR are greater in the case of project A, we would choose project A since these are mutually exclusive projects.
Should I use IRR or NPV for mutually exclusive projects?
Nevertheless, when faced with a conflict between IRR and NPV in the case of mutually exclusive projects, it is suggested to go ahead with the NPV method as this happens to show the amount of real wealth gain for the company. The company will be able to optimally select the best project/investment that gives in the best returns.
Can a company invest in all three projects simultaneously?
It can’t invest simultaneously in all the three projects. In such situation, the company should opt for projects generating the maximum net present value i.e. Project B. Although Project A has higher IRR , in case of mutually exclusive projects, a decision based on net present value is theoretically sounder.
Can We continue the NPV analysis for projects with different lifetimes?
We can continue the NPV analysis without any problem for mutually exclusive projects with different lifetimes. This is because NPV analysis considers a common point in time for all projects, which is the present time.