What would you use to evaluate a mutually exclusive project?

Methods used by Companies to Evaluate Mutually Exclusive Projects

NPV refers to the present value.
It is nothing but the discount rate that would make all of the present values of cash flows equal to the initial outlay.
The payback Period.

What circumstances can the IRR rule not be used to compare mutually exclusive projects?

When choosing among mutually exclusive investment opportunities, pick the opportunity with the highest NPV. We cannot use the IRR to compare investment opportunities unless the investments have the same scale, timing, and risk.

What are two possible causes of conflicts between the IRR and NPV for mutually exclusive projects?

What are two possible causes of conflicts between the IRR and NPV for mutually exclusive projects? The two possible conflicts are; conflict in differences with scale and timing, and conflict when selecting a project with higher NPV.

When mutually exclusive projects are considered both NPV and IRR will always produce the same acceptance decision?

When mutually exclusive projects are considered, both NPV and IRR will always produce the same acceptance decision. When evaluating two projects that require different outlays, the IRR does not recognize the difference in the size of the investments.

Is the best method of analyzing mutually exclusive projects?

Net present value: 1. is the best method of analyzing mutually exclusive projects. 2. is less useful than the internal rate of return when comparing different sized projects. 3. is the easiest method of evaluation for non-financial managers to use.

What is a good IRR for a project?

Any time the discount rate is below the IRR, it’s a positive NPV project. So if our hurdle rate is 7% and the IRR is 12% it’s a good project. IRR is similar to NPV, except that we have discounted the cash flows to a percentage rate where the discounting just crosses to negative, at 0.

Should you use NPV or IRR to choose between the two projects?

In order for the IRR to be considered a valid way to evaluate a project, it must be compared to a discount rate. If a discount rate is not known, or cannot be applied to a specific project for whatever reason, the IRR is of limited value. In cases like this, the NPV method is superior.

What is the IRR rule?

The internal rate of return (IRR) rule states that a project or investment should be pursued if its IRR is greater than the minimum required rate of return, also known as the hurdle rate. The IRR Rule helps companies decide whether or not to proceed with a project.

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.

Are there any drawbacks to the IRR method?

The cash flows of one project may increase over time, while those of others may decrease and vice versa. The major drawback with the IRR method is that for mutually exclusive projects, it can give contradictory investment decision when compared with NPV. Consider the following example. In the above example A and B are mutually exclusive projects.

When to use NPV vs.irr in a project?

In the case of mutually exclusive projects that are competing such that acceptance of either blocks acceptance of the remaining one, NPV and IRR often give contradicting results. NPV may lead the project manager or the engineer to accept one project proposal while the internal rate of return may show the other as the most favorable.

Why are investment projects said to be mutually exclusive?

Investment projects are said to be mutually exclusive if only one project could be accepted and others would have to be rejected. NPV and IRR methods for project evaluation leads to conflicting results under following conditions: The pattern of cash inflows plays an important role in project evaluation while using IRR method. i.e.