# When Projects are mutually exclusive which project should be selected using npv and risk level?

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.

### 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 is meant by opportunity 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

### 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. Nowaid Response to the Caledonia Products Integrative Problem Project 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…

### 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

### What is the advantages and disadvantages of profitability index?

Profitability Index Advantages Tells whether an investment increases the firm's value Considers all cash flows of the project Considers the time value of money Considers the risk of future cash flows (through the cost of capital) Useful in ranking and selecting projects when capital is rationed Disadvantages Requires an estimate of the cost of capital in order to calculate the profitability index May not give the correct decision when used to compare mutually exclusive projects