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When Projects are mutually exclusive which project should be selected using npv and risk level?
Wiki User
∙ 16y ago
Problems with project ranking:
1. Mutually exclusive projects of unequal size (the size disparity problem) - the NPVdecision may not agree with the IRR or PI. Solution: select the project with the larges NPV (not IRR).
2. The time disparity problem with mutually exclusive projects - NPV and PI assume cash flows are reinvested at the required rate of return for the project. IRR assumes cash flows are reinvested at the IRR. NPV decision may not agree with the IRR. Solution: select the project with the largest NPV.
A good method to evaluate and rank project better is to use the Equivalent Annual Annuity (EAA) method. This is like calculating for PMT when doing TVM. It simply means, you will be getting that amount as an inflow each year or period. Therefore, you would want to choose the highest figure.
Wiki User
∙ 16y ago
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What are mutually exclusive projects?
Mutually exclusive projects means that the acceptance of one project eliminates the others fromconsideration. Projects are said to be mutually exclusive when tehy cannot be undertaken simultaneously.
What is the difference between independent and mutually exculusive projects with normal and nonnormal cash flows?
Independent projects are those which are not related or dependent on any other projects while in mutually exclusive projects if one project is selected other project automatically discards
IWhat is the difference between independent project and mutually exclusive project?
Mutually exclusive is the situation in which only one of two projects designed for the same purpose can be accepted and independent projects is a project whose feasibility can be assessed without consideration of any others.
Examples of mutually exclusive projects?
The simplest way to explain a mutually exclusive project would be in terms of real estate building. If you were debating whether to build a one or two story house on a plot of land, that is a mutually exclusive project because you cannot build both houses on one plot.
What is oppritunity cost?
In the process of decision making between mutually exclusive projects any cost which is left due to selection of alternative project is called the opportunity cost. For Example: if a person select project a and have to loss 1000 due to selection of project a, or if person select project b and loss 2000 due to it then project a has an opportunity cost of 1000 while project b has 2000.
What are mutually exclusive projects?
Mutually exclusive projects means that the acceptance of one project eliminates the others fromconsideration. Projects are said to be mutually exclusive when tehy cannot be undertaken simultaneously.
What is the difference between independent and mutually exculusive projects with normal and nonnormal cash flows?
Independent projects are those which are not related or dependent on any other projects while in mutually exclusive projects if one project is selected other project automatically discards
IWhat is the difference between independent project and mutually exclusive project?
Mutually exclusive is the situation in which only one of two projects designed for the same purpose can be accepted and independent projects is a project whose feasibility can be assessed without consideration of any others.
Examples of mutually exclusive projects?
The simplest way to explain a mutually exclusive project would be in terms of real estate building. If you were debating whether to build a one or two story house on a plot of land, that is a mutually exclusive project because you cannot build both houses on one plot.
What is oppritunity cost?
In the process of decision making between mutually exclusive projects any cost which is left due to selection of alternative project is called the opportunity cost. For Example: if a person select project a and have to loss 1000 due to selection of project a, or if person select project b and loss 2000 due to it then project a has an opportunity cost of 1000 while project b has 2000.
Projects to be selected in mpharm pharmaceutics?
how to choose m.pharm pharmaceutics project??
What is an oppourtunity cost?
When Mutual exclusive decision is to be made or projects to be selected, the benefit which is left due to selection of one project instead of other project is the 'Opportunity Cost' for selecting one project over other. Example: Project 1 benefit = 100000 Project 2 benefit = 200000 Opportunity cost for project 1 = 200000 Opportunity cost for project 2 = 100000
Which technique is used to deal with the choice between mutually exclusive projects which have different lives?
Equivalent Annual Costing (EAC) if Liability, or Equivalent Annual Cash-Flow (EACF) if investment. We calculate the Present Value of the project by discounting back each cash-flow from each year at the discount rate, then multiple the sum of these PVs by the respective annuity factor(which will be different for each mut-exlu project). We choose the project that has the favourable EAC/EACF.
Response to the Caledonia Products Integrative Problem?
Response by R. NowaidResponse to the Caledonia Products Integrative ProblemProject ranking is prioritizing projects based on a project's stream of cash flow by measuring net present value (NPV), the internal rate of return (IRR), and Macaulay duration that is calibrated based on cash-flow timing. Conflict of ranking arises when managers have to make subjective decisions due to organizational goals and needs. In a mutually exclusive projects three factors remain as key ranking elements; (1) size disparity; (2) time disparity; and (3) unequal lives.Size Disparity"The size disparity problem occurs when mutually exclusive projects of unequal size are examined." In the case for Caledonia Products, Project A and B may have the same initial investment amount; however, cash inflow of Project A begins in the first year but Project B begins in the fourth year. Both projects vary on net to present value, internal rate of return, and profitability index. If size disparity causes conflicting ranking among mutually exclusive projects, then the project with the largest net present value is considered; given the fact that there would be no capital rationing. Standing alone on this criteria, Project B is more viable because total NPV of Project B is higher that Project A.Time Disparity"The time disparity problem and the conflicting rankings that accompany it result from the differing reinvestment assumptions made by the net present value and internal rate of return decision criteria." In case of Caledonia Products, total cash flow at the fifth year for Project A is $40,000 less than Project B's, NPV for Project A is less than Project B's. Project A begins cash inflow at the first year, the payback period for Project A is 3.125 years versus 4.5 years for Project B, and IRR for Project A is 18.03% versus Project B's IRR is 14.87%. Assuming that cash inflow during life of project can be reinvested, that would make Project A to be more viable.Unequal LivesUsing size and time disparities in conjunction with NPV and IRR may lead to conflicting results in analyzing mutually exclusive projects. A primary cause of conflicting ranking can be timing of the cash flows of the mutually exclusive projects. In the case of Caledonia Products, Project B may have higher total cash flow at maturity and NPV of Project B may be higher as well; however, Project A makes cash available now. Knowing cash is king, and Project A's cash inflow begins in the first year versus Project B's cash inflow that begins in the fifth year, and this feature would make Project A more attractive.AnalysisInitial net investment in Project A and Project B are equal; however, total cash flow for Project A is $40,000 less than Project B's total cash flow and NPV for Project A is less than Project B's NPV.Considering aforementioned facts one manager may consider Project B because it has greater NPV and total Project cash value; however, Project A has one main incentive, on-going cash flow throughout the Project. Project A generates continues cash flow through the life cycle of the Project; whereas, Project B requires the organization to operate without incoming cash flow until the Project is completed.Conclusively, if the organization is in need of cash to maintain profitable operation by avoiding external financing and loan, then Project A makes most sense; however, if the organization is not in need of immediate cash, then Project B is a better decision. For example, a small construction company needs continues cash inflow to prevent expensive financing of project. On the other hand, a major meatpacking firm, which does not have cash flow problem, may wait to the delivery date to collect all its funds at a greater amount.
Which technology to choose for Ty Bsc IT projects?
see the answer for this question will be going to be dependent on the type of project you have selected. There are mainly two types of project 1. Desktop Application. 2. Web Application Project. So first please clarify your question.
What are the name of marketing projects for MBA?
The scope of Marketing project is very wide. The projects can be selected on advertising, Channel/distribution, pricing, product, branding, social media, public relation or service and direct marketing.
What are the differences between profitability index and net present value?
The NPV and PI both consider the time value of money and result in the same accept or reject decision when considering an independent project. The main difference between the two is that the PI may be useful in determining which projects to accept if funds are limited; however, the PI may lead to incorrect decisions when considering mutually exclusive investments
