Mutually Exclusive Projects
Mutually exclusive projects are two projects wherein the taking up of one project prevents the taking up of the other project. Say for ex if there are two projects A and B respectively then A and B are said to be mutually exclusive if the investor decides to invest in project A he cannot invest in project B and vice versa. It can also be termed as
It is important for a fund manager to rank these mutually exclusive project based on the return. These rankings are important while making investment decisions. Usually fund managers uses NPV and IRR method to rank the projects. In most of the cases these two methods fail miserably. Therefore it becomes difficult for the investor to make decisions. The main problem in the above two method is the lack of consideration of the time period in these methods. Time period plays a vital role in the investment decisions. Since the time period is not considered in the above two method ranking based on the above two methods often end up in a failure. Mathematically it can stated that the varying cash in flow of the various investments are the primary reason for the not including the time factor in the calculation.
Mutually exclusive projects are often a head ache to the investors. They have to decide upon from the two projects with same cash inflow and growth rate. They cannot invest in both the projects. Taking up of opportunity in one project prevent the opportunity in the second project.
Some of the examples of mutually exclusive investments are,