Mutually Exclusive Projects

Projects are mutually exclusive when only one of the set of projects can be accepted by a firm. Projects may be mutually exclusive for different reasons. They may each provide a way of getting a needed service, but any one of them is sufficient for the service. The owner of a commercial building may be choosing among a number of different air-conditioning or heating systems for a building. Or, projects may provide alternative approaches to the future of a firm; a firm that has to choose between a "high-

margin, low volume" strategy and a "low-margin, high-volume" strategy for a product can choose only one of the two.

In choosing among mutually exclusive projects, we continue to use the same rules we developed for analyzing independent projects. The firm should choose the project that adds the most to its value. While this concept is relatively straightforward when the projects are expected to generate cash flows for the same number of periods (have the same project life), as you will see, it can become more complicated when the projects have different lives.

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