NPV/Mutual Exclusive Projects
If you recommend a project that has a NPV of $1 and the discount rate is conservative, how would you respond to these scenarios? Which projects should be accepted or rejected?
a. There are not any other mutually exclusive projects.
b. Your co worker has an idea for another mutual exclusive project. The NPV of the new project is $2.
c. Your co worker has an idea for another project. The NPV is $2. The projects are not mutually exclusive.
I know that its good if the NPV>0. but I am confused on the rest
MEmily1105, sorry about the lack of response. Maybe one of these topics will help:
Calling relevant pros to the rescue! tiptonet AntiKobe Luca-Sechi
Fingers crossed that one of those helps you.
If you have unlimited capital (i.e. no other mutually exclusive projects), you would theoretically do any project with an NPV > 0. If you have limit capital you would pick the highest NPV project. So:
a. You would do the $1 project that you proposed (because NPV is > 0)
b. You would skip your project and do the $2 project that your friend proposed. (you have to pick the best project if they are mutually exclusive)
c. You would do both projects (because there is no limit to the # of projects you can do)
Also depending on the time frame and number of projects that can be completed, use IRR if there is a large number of projects vs. large, capital intensive projects. Always choose the higher NPV project.
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