BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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One project will always have a negative NPV.
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There is a scarce resource that both projects would need.
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There is need for only one project, and both projects can fulfill that current need.
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By using funds for one project, there are not enough funds available for the other project.
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Detailed explanation-1: -Projects are mutually exclusive if picking one project eliminates the ability to pick the other project. This mutually exclusive situation can arise for different reasons. Which of the following is not a reason? One project will always have a negative NPV.
Detailed explanation-2: -A project is said to be mutually exclusive; that is, a situation in which the acceptance of one project by the firm leads to the automatic rejection of the remaining project. This process is used in capital budgeting and it is based on some parameters on which the firm determines the viability of the project.
Detailed explanation-3: -When two projects are mutually exclusive, accepting one project implicitly eliminates the other. The net present value technique is an approach that goes against the goal of shareholder wealth maximization. The NPV method determines how much the present value of cash inflows exceeds the present value of costs.
Detailed explanation-4: -If projects are mutually exclusive, accept the one with the highest IRR (assuming it is above the hurdle rate).
Detailed explanation-5: -Independent projects are those whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.