Mutually exclusive investments are a set of prospective capital investments, where the selection of one investment automatically excludes the other projects from being funded.

Why are investment projects mutually exclusive?

Mutually exclusive projects are capital projects which compete directly with each other. For example, if a manager has to make a choice strictly between undertaking either project X or Y, but not both of them concurrently, then projects X and Y are said to be mutually exclusive.

Is IRR an acceptable method to compare two mutually exclusive projects?

For mutually exclusive projects, if the IRR is greater than the cost of capital, you accept the project. If it is less than the cost of capital, then you reject the project.

What makes a project a mutually exclusive project?

A set of projects from which at most one will be accepted is termed as Mutually Exclusive Projects. In mutually exclusive projects, cash flows of one project can be adversely affected by the acceptance of the other project. In mutually exclusive projects, all projects are to accomplish the same task.

How is a mutually exclusive investment decision defined?

A mutually exclusive investment decision is defined as a situation where: an investment in project A prohibits you from investing in project B. The present value of an investment’s cash inflows divided by the investment’s initial cost is called the. profitability index.

How are cash flows affected in mutually exclusive projects?

In mutually exclusive projects, cash flows of one project can be adversely affected by the acceptance of the other project. In mutually exclusive projects, all projects are to accomplish the same task.

What’s the difference between mutually exclusive NPV and IRR?

The NPV and IRR assuming a discount rate of 10%, are displayed below as follows. If you happen to notice, NPV of project B is greater than A, whereas the IRR of project A is greater than project B. Mutually Exclusive Mutually exclusive refers to those statistical events which cannot take place at the same time.