Question

Using everything you know about capital budgeting, if the two projects are mutually exclusive, which project or projects should the firm undertake? Explain in full. The answer must be complete. Substantiate with numbers.

Answer 1

Capital budgeting is the decision making technique where initial cash outflow and cash inflow are compared to come to an conclusion about the project. In case of two mutually exclusive project one should be chosen which have higher Net present value. In case where the NPV is same for both/all the project then this situation is indifferent, any project can be selected.

Net present value = Present value of cash inflow - Initial cash outflow

For example there are two project A and B. Project A has NPV of $ 25000 and Project B has NPV of $ 32000 so in this case project B should be choosen as it has higher NPV.