What is the difference between normal and nonnormal cash flow streams? Normal cash flow stream – Cost (negative CF) followed by a series of positive cash inflows. Nonnormal cash flow stream – Two or more changes of signs. Most common: Cost (negative CF), then string of positive CFs, then cost to close project.

What do you mean by mutually exclusive projects?

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.

What is capital budgeting What is the difference between independent and mutually exclusive projects?

Projects are independent if the cash flows of one are not affected by theacceptance of the other. Conversely, two projects are mutually exclusive if acceptanceof one impacts adversely the cash flows of the other; that is, at most one of two or moresuch projects may be accepted.

Which is an example of a mutually exclusive project?

(Examples) What are Mutually Exclusive Projects? 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 to use NPV in mutually exclusive projects?

NPV, too, has its disadvantages as it does not consider the scale of a project. 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.

How is the IRR of a mutually exclusive project determined?

Similarly, IRR can now also be arrived at using the IRR function in excel, as demonstrated below. NPV is positive in the case of both projects, and IRR is greater than the discount rate of 13%. Since the projects are mutually exclusive, we can’t choose all the projects simultaneously.